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Profiles in Innovation - Space - The Next Investment Frontier Goldman Sachs
Profiles in Innovation - Space - The Next Investment Frontier Goldman Sachs
Brett Feldman
INSIDE: +1 212 902-8156
brett.feldman@gs.com
Goldman, Sachs & Co.
PROFILES I N I N N O V AT I O N
The Next Investment Frontier
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. For Reg AC certification and other important disclosures, see the Disclosure
Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.
Table of Contents
Space in numbers 3
Executive summary 4
The Ecosystem 7
Rocket Science 101 9
Rockets 9
Satellites 10
Ground infrastructure 13
Creative Disruption 17
Launch: Access to space is now cheaper and easier 19
Satellite Manufacturers: Rapidly changing capabilities 36
Satellite Services: Structural changes in supply & demand 44
Insurance: For when things go boom 52
Venture Capital Horizons 55
Nuance within Space: Sub-verticals in focus 57
Expect VC funding in Space startups to accelerate 58
Exploration 63
Civil Space: Wrestling with the value of exploration 64
New Space Explorers: Emerging markets in space 71
Earth Observation – Eyes in the Sky 71
Tourism – Normalizing human spaceflight 73
Space Mining – Unlimited resources? 74
On-orbit OEMs – The backbone of the future 76
Militarization 79
Why Space is poised to outgrow the budget 83
What does the greater threat imply for investment? 90
Disclosure Appendix 94
Contributing authors: Noah Poponak, CFA; Matthew Porat; Michael Bishop; Chris Hallam; Heath P. Terry, CFA; Brett
Feldman; Andrew Lee; Sam Wood; Peter Lapthorn; Gavin Parsons; Tais Correa; Adam Hotchkiss; David Tamberrino, CFA.
This is the eighth report in our Profiles in Innovation series analyzing how emerging technologies are creating
profit pools and disrupting old ones. Access the entire series below and visit our portal to see related resources,
including a video on the topic.
Virtual & Drones Factory of the Blockchain Precision Farming Advanced Artificial
Augmented Reality Future Materials Intelligence
$13.3 BILLION
Total investment in space start-ups since 2000, heavily
SATEL-LITE
weighted toward the last 10 years. (p. 60)
47%
launch revenues in 2016, driven
(orbiting gas stations, anyone?). We believe space mining
largely by SpaceX, creating a virtual
is still a long way from commercial viability, but it has the
duopoly between US (SpaceX) and
European (Arianespace) launchers.
2016 potential to further ease access to space and facilitate an
in-space manufacturing economy. (p. 74)
(p. 23)
Executive summary
The Second Space Age has begun, and the forces of innovation and disruption are
overtaking formerly stagnant industries. New technology is emerging, as old assets
fossilize and certain legacy industries wrestle with structural change. Space has always
played an important role in our lives, a lynchpin in the modern era, with so many
components of everyday life either due to, or reliant on, space and its players. But the
space economy is also now inflecting, and we believe will become a multi-trillion dollar
market within the next two decades.
The key driver of change today is the enabling power of major change in the commercial
launch and satellite manufacturing industries. While relatively small markets today, rapidly
falling costs are lowering the barrier to participate in the space economy, making new
industries like space tourism, asteroid mining, and on-orbit manufacturing viable, and
growing the existing flagship communications satellite services business while taking
exploration deeper into space.
Space is becoming a military focal point as governments pivot off Earth and space
becomes more congested. If conflict were to start between substantial powers, the opening
salvos could be in space, where years of underinvestment have left key assets vulnerable.
This looks set to drive an immediate resurgence in US military space investment.
For more on the Venture Capital Horizons: As part of our VCH initiative, Heath Terry
Venture Capital assesses the venture capital funding landscape in Space, finding that new
Horizons initiative, funding in the sector has been growing rapidly in recent years.
see the team’s
inaugural report (2) Exploration – where we assess whether or not NASA can resurge, and what it
Venture Capital next explores, as well as look at new exploration industries including space
Horizons: The Global tourism and asteroid mining.
Venture Landscape.
(3) Militarization – where we assess the degree of criticality of space in military
strategies, and look at the potential for increased investment in space by the US
military, given both its significance and vulnerability.
2. Satellite: Services end markets are seeing oversupply and therefore pricing is
deteriorating rapidly. Planned growth in small satellites, satellite constellations,
and high throughput satellites could exacerbate this situation.
3. A new economy: While new entrants pushing new boundaries can be harmful to
some near-term, it is opening up an entire new space economy with substantial
new opportunity, long term.
We believe a new space renaissance has started, where a positive feedback mechanism of
exploration and budget allocation could fuel development of the space economy. With
greater access to space, there could be a renewed interest in space exploration. Several
industry participants are targeting Mars. Others believe traditional Earth-based
manufacturing should be done on-orbit. Asteroid mining could crater the global price of
platinum, and could also reduce the fuel requirement to send rockets to geostationary orbit,
while potentially solving other major energy needs on Earth.
NASA and other civil agencies are undergoing a wave of privatization, shifting government
responsibilities to private companies. Budgets for science & exploration are moving slowly,
but a renewed political interest amid geopolitical competition could drive spending higher.
3. Entirely new industries: New technologies are creating new industries (tourism,
mining, manufacturing), which are important sources of growth and progress.
Exploration: Exposures
Civil Space Emerging Space Markets
We look at how protection of these assets is becoming a core pillar of US strategy, as well
as what new assets are being added to national security constellations. The crowding in
space has the potential to threaten both military and commercial assets. All told, we see
both the unclassified and classified space portions of the US DoD budget growing faster
than total spend in both the medium and long term.
3. Space moves Defense numbers more than you might think: Our assessment of
the DoD budget shows that Space is a larger portion of US Defense, growing at a
faster rate, than we think the average A&D investor realizes.
Military: Exposures
Northrop Grumman (NOC): Classified Lockheed Martin (LMT): Large share of Boeing (BA): Government satellite OEM,
payloads likely a large part of their government business, particularly as member of ULA
overall business & government exposure prime member of United Launch Alliance
(ULA), focused on space awareness
Harris Corp. (HRS): Antenna and Raytheon (RTN): Government-focused SpaceX (Private): New government-
payload specialization, particularly on payload manufacturer, with exposure to qualified rockets with compelling pricing
the government side ground stations and smallsats
2. Growth: Recent years have seen substantially more space startup companies
formed, and substantially more venture capital put into the sector, compared to
any time in history.
3. Who?: A lot of investment has been from, or into, well known players in the sector
– like Google and Fidelity investing in SpaceX, or Softbank investing in OneWeb.
But dozens of smaller firms have put money into smaller privates as well.
SoftBank: Invested in OneWeb, likely making it the largest space VC SpaceX: Reusable launch provider with plans for large satellite Internet
investor constellation
Bessemer: Invested in Rocket Lab, Skybox, Spire OneWeb: Likely first major LEO communications constellation operator
Fidelity: Major investor in SpaceX Rocket Lab: Raise reportedly implied value of >$1bn before first launch
of its Electron ultralight rocket
Google: Major investor in SpaceX, Terra Bella
Planet Labs: Earth observation/big data entrant with growing smallsat
constellation
Medium-Heavy Launch Growth in demand from Internet satellite services creates new opportunity pools for select players, despite headwinds
Military Satellite OEMs New wave of classified opportunities in the pipeline amid renewed focus on space and space asset protection
Mobility Satellite Services Possible demand outgrowth in niche markets where pricing is more stable
Ultra-Light Launch Opportunities abound for smallsat launch, but risks from larger rockets capturing share
Gov’t Satellite Services Military demand increasingly captured by commercial providers and pricing is more stable, but volumes are comparatively low
Earth Observation Numerous new applications but the path to commercial profitability is unclear for capex-intensive operators
Satellite OEMs Headwinds to capex spend and growing satellite capabilities at low cost dampen outlook for volume and pricing
Insurance Continuing compression of rates amid heightened risk associated with new rockets
Video Satellite Services Facing both space and terrestrial headwinds, leading to potential 50% decline in pricing over next five years
Most Negative
Satellite Manufacturers
Boeing
Lockheed Martin
MacDonald Dettwiler & Associates
Northrop Grumman
Orbital ATK
Launch Providers
Airbus Lockheed Martin
Harris Corp Boeing
Raytheon Airbus
Thales Safran
ViaSat Orbital ATK
SpaceX SpaceX
L3 Technologies Blue Origin
Embraer Mitsubishi Heavy Industries
China Academy of Space Technology International Launch Services
China Great Wall Industry Corp.
Virgin Galactic
Stratolaunch
Vector
Operators Rocket Lab
OneWeb XCOR Aerospace
ViaSat
Dish Network
AT&T
Intelsat
Sirius
Inmarsat
Eutelsat
SES
Airbus
DigitalGlobe
Planet Labs
Spire
Iridium
Planetary Resources
Deep Space Industries
April 4, 2017 Profiles in Innovation
Rockets
Most payloads (i.e., satellites, scientific probes, human transport capsules, etc.) get to
space on expendable rockets. Reusable systems, like the Space Shuttle, have been tried,
but there are outstanding questions about reliability and refurbishment cost. While most of
the weight of the rocket is fuel, the vast majority of the cost is in the hardware, driving Elon
Musk’s argument that returning a rocket for reuse can lead to substantial cost savings.
Staging
Rockets are built on a layered system, with the most powerful propulsion in the first (main)
stage. That stage provides the initial lift as the rocket pushes past the thickest parts of the
Earth’s atmosphere. Strap-on boosters can be added to provide additional thrust. Typically,
that main stage and the boosters are jettisoned as they run out of fuel, giving way to a
smaller upper stage. This stage then lifts the now-lightened rocket and payload into space.
It is not uncommon for there to be multiple upper stages (though usually no more than
two). Some rockets deliver satellites directly to their final positions, but generally small
thrusters on the satellite itself perform the final precise maneuvering.
Liquid-fueled rockets… chemistry at thousands of miles per hour: These rockets store
fuel and oxidizer in separate tanks before mixing them in the engine as part of the
combustion reaction that provides lift. The rocket is only filled prior to launch due to the
volatile nature of the fuel and oxidizer, so storage and fueling mean that these launches
must be planned well in advance and conducted under highly controlled conditions. As
examples, ULA’s Atlas V and SpaceX’s Falcon 9 both employ liquid-fueled first stages.
Upper stages for most rockets are liquid-fueled as they enable more precise maneuvers.
Solid-fuel rockets…gunpowder in a tube: Solid rockets have the fuel and oxidizer
premixed in a single shaped compartment. This technology is seen in ordinary fireworks
and US Minuteman intercontinental ballistic missiles. These rockets are more stable than
liquid-fueled peers, allowing them to be carefully stored and launched at short notice.
Once lit, solid rockets will burn until they run out of fuel, reducing precision to some
degree. The historical drawback of these rockets is that the ‘ride’ tends to be a little rougher
than liquid alternatives. Orbital ATK says they have been able to eliminate this problem,
which may allow them to qualify for the most sensitive national security payloads.
Industrial base: Many A&D companies participate in rocketry, providing either integrated
solutions or critical subsystems. Major manufacturers include ULA (Lockheed Martin-
Boeing JV), Orbital ATK, Arianespace (Airbus-Safran JV), SpaceX, Blue Origin, International
Launch Services (Russia SOE), and China Great Wall Industry Corporation (China SOE).
Satellites
There are about 1,500 satellites orbiting the Earth today, generally split between
commercial, military, non-military government and civilian (mostly academic), though
some satellites fly with dual payloads. While about a quarter of satellites are for primarily
military applications, we think that military satellites draw roughly 3/4 of spending (based
on our spending analysis).
Most communications satellites weigh more than 1,000kg, but some space assets like the
Hubble Telescope can be more than 10X that. Increasingly, small satellites, often referred
to as “smallsats” are becoming more prevalent as miniaturization enables a more flexible
platform. Some of the smallest are known as CubeSats—roughly measuring 10X10X10cm
and weighing about 1kg. Standard commercial satellites normally have about 15 years of
fuel onboard, with electronics rated for longer. Smallsat operators typically plan for just 1-3
years of operations. At the end of their lives, satellites are generally placed in graveyard
orbits or de-orbited, but some operators leave them in place, creating dangerous space
debris.
GEO
36%
LEO
55%
MEO
7% Elliptical
2%
Source: Goldman Sachs Global Investment Research. Source: Union of Concerned Scientists (All instances use
the 6.30.16 data set).
Medium Earth Orbit (MEO) lies between GEO and LEO and represents a compromise
between the two. Some two-way communications networks operate here, where tens of
satellites can provide global coverage but latency is reduced. GPS flies in MEO with 32
satellites, providing global navigation services.
Elliptical Orbit can be any of several non-circular pathways. These orbits tend to have
specialized applications, with one of the most common being polar coverage, which is
normally not well-serviced by satellites aligned with the equator. A geostationary transfer
orbit (GTO) is a special elliptical orbit that is used as an intermediate step to deliver
satellites to GEO, before they eventually circularize at the far end of the ellipse.
While most satellites in terms of units are in LEO, the concentration of value is in GEO,
where most large telecom satellites are positioned.
Exhibit 5: A satellite represents only half of program Exhibit 6: The capex associated with a satellite is
costs typically split over three years prior to launch
Typical satellite program capex profile Typical timing of capex payments
Others, 6%
Insurance, 10%
Satellite, 50% 40%
30% 30%
Launcher, 34%
€ mn
500 End of Life
Board Launch
400 Decision
300 Replacement
Satellite
200 entry into service
Procurement Ramp Up Life‐Span
100
0 Procurement
Contract Entry into
‐100 service
‐200 Relocation of
Board Decision for
previous Satellite
‐300 replacement Satellite
‐3 ‐2 ‐1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year
USA, 24%
Other, 29%
USA, 40%
Other, 47%
China, 15%
India,
3%
United
Kingdom, Russia, China, 13% Russia, 2%
3% 10%
Japan, 6%
United
Japan, 4% Kingdom,
India, 3%
4%
Industrial base: Most satellites are built in the US or Europe. In US military, Northrop,
Lockheed, Boeing, Harris, Raytheon, and Orbital ATK compete. In Europe military, Airbus
appears to have the largest share. State owned enterprises tend to be pervasive in other
countries. Key commercial manufacturers listed below make ~3/4 of the commercial satellites.
Source: FAA.
Operator base: Satellite operators range from large-cap companies to startups and
universities. Companies like Intelsat, Inmarsat, Eutelsat, SES, DISH, and SIRI fly GEO
satellites. LEO constellations (some existing, some planned) include Iridium, OneWeb,
SpaceX, Planet Labs, and Spire.
Ground infrastructure
Ground infrastructure enables satellite launches, tracking, and connectivity to end users.
Access to space requires launch pads and rocket servicing facilities. Once satellites are up,
there is need for continued fleet maintenance, data processing, and command and control
of space assets, especially those operated by the government. Finally, space assets are tied
into the terrestrial economy largely through consumer equipment– from satellite dishes
used for TV to GPS receivers in smartphones.
Exhibit 11: Map of active United States launch and reentry sites
Dots represent licensed or government sites; stars represent non-licensed sites
Globally, we highlight 10 countries that manage the most active launch and reentry sites.
Exhibit 12: Map of main active global launch and reentry sites
Russia, China, France, Japan, South Korea, North Korea, Israel, India, Kazakhstan and the US manage the most active facilities
Source: FAA.
Exhibit 13: Ground equipment sales, SIA Exhibit 14: Ground equipment sales, European GNSS
A $59bn market More comprehensive definition increases the market size
70.0 90.0
80.0
60.0
70.0
50.0
60.0
40.0
50.0
30.0 40.0
20.0 30.0
20.0
10.0
10.0
-
-
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Satellite Industry Association (SIA). Source: Satellite Industry Association (SIA).
Connecting people: One of the greatest hurdles for proposed LEO fleets is the ground
element, especially in developing countries where the cost could be prohibitive. Non-GNSS
refers to the receiving end, on the consumer side, for content and data products.
Finding people: The European GSA estimates that over 90% of GNSS market revenues
come from location-based services (53%) and road applications (38%). GNSS hardware
communicates with satellites to provide geolocation anywhere on Earth. In the US, this is
known as GPS.
Component
Service and App developers /
manufacturers Device vendors App Stores
content providers retailers
(receivers and others)
Road applications of GNSS are part of a shift to smarter infrastructure, allowing for
improvements in transport productivity, safety and monitoring and tracking capacities.
System integrators
Satellite: Services end markets are seeing oversupply and therefore pricing falling drastically.
Planned growth in small satellites, satellite constellations, and high throughput satellites could
exacerbate this situation.
A new economy: While new entrants pushing new boundaries can be harmful to some near-term,
it is opening up an entire new space economy with substantial new opportunity, long term.
Major players: NewSpace: SpaceX, Blue Origin, OneWeb, Rocket Lab, Vector. OldSpace: ULA,
Arianespace, Orbital ATK, MDA, Intelsat, Eutelsat, Inmarsat, SES, Dish Network.
April 4, 2017 Profiles in Innovation
The commercial satellite services industry is entering an arms race to acquire the most
capacity as pricing collapses in end markets. A single satellite is now being built with more
Internet bandwidth than everything launched into orbit, ever. A constellation of small
satellites will likely grow the amount of bandwidth on orbit by a factor of at least 10X, at a
rapidly falling cost. At the same time, pricing in the launch industry is plummeting. On a
cost per kg to LEO basis, prices will soon have fallen by about 90% over the last decade.
Decreased launch cost lowers the barrier to entry and helps incumbents that may take
advantage of lower capex to flood the market with additional capacity.
We do not expect all existing players to survive the turbulence that is unfolding, but we
also expect new companies to rise to the challenge to take the place of those that fail. The
near term will present challenges, but in the back half of the next decade we see supply
and demand balancing once prices have fallen sufficiently to fit the budgets of the rural
populations of developing countries. Given our view on elasticity in the space economy,
though with some stickiness, we expect lower prices to spur demand for launch, spacecraft,
and satellite services.
LAUNCH Prices
Launch: Access to space is now cheaper and easier
lower
as new generation takes flight
Center of Newspace activity
Access to space is now cheaper and easier Jury still out on reusability
Access to space is the greatest impediment to opening the space economy of the future.
But by the end of this year, we expect launch costs to have compressed 10X over a decade,
with improvements in capability and reductions in cost fundamentally changing the math
for investment in space. Costs in launch have declined more in the last decade than during
the entire prior period of space exploration. As this barrier to entry is lowered, new
applications become feasible, fueling demand – key to keeping costs low.
A new generation of rockets is about to take flight. The next decade will pit three
competing designs against each other in a negative pricing environment. Reusable liquid-
fueled rockets, non-reusable liquid-fueled rockets, and solid-fueled rockets will vie to
become the cheapest and most reliable rocket, in what will become a lean environment in
the short-to-medium term, especially given the entrance of new competitors. Large bulk
orders and intracompany purchase are likely to be key differentiators.
Lower launch costs may be just what saves the satellite services industry in the near term
and catalyzes growth over the longer term. The risk of oversupply is putting increasing
pressure on the satellite services providers, and low launch costs in a worsening pricing
environment may be the only way to sustain sufficiently attractive IRRs for GEO operators.
Ultimately, over the long term, we see the low launch costs fueling demand as new
applications become possible with the lowered financial barriers to the space economy. In
the words of Jeff Bezos, “the cost of admission to do something interesting in space is too
high,” despite recent decreases, and that prevents the dynamism necessary for developing
the space economy. Low-cost operational reusability is likely the most efficient way to
normalize access to the space economy long term, which is ultimately the future of the
Earth economy in our view. Less than a week ago, SpaceX successfully re-launched a main
stage as part of the SES-10 mission, marking the first time a commercial orbital class rocket
has been re-flown. This event, coupled with the five suborbital launches conducted by Blue
Origin’s New Shepard, is a promising data point for the future of reusability.
Exhibit 19: Light rocket pricing over time Exhibit 20: Light rocket pricing per kg to LEO
New designs tend to focus on a new class of launcher Smaller rockets tend to be more expensive per kg
$90 $60,000
Most new rockets are of the new
$80 ultralight class
$50,000
$70
$60 $40,000
$50
$mn
$30,000
$40
$30 $20,000
$20
$10,000
$10
$0 $0
Soyuz 2.1v (2013)
Dnepr (1999)
Minotaur IV (2010)
Rockot (2000)
Epsilon (2013)
Kuaizhou 1/1A (2013)
Minotaur-C (2017e)
Kuaizhou 11 (2017e)
LauncherOne (2017e)
Intrepid 1 (2018e)
Bloostar (2019e)
Minotaur I (2000)
Vega (2012)
Alpha (2017e)
Electron (2017e)
GOLauncher-2 (2017e)
Vector H (2019e)
Arion 2 (2020e)
Long March 2D (1992)
CAB-3A (2017e)
Minotaur I (2000)
Kuaizhou 11 (2017e)
Epsilon (2013)
LauncherOne (2017e)
GOLauncher-2 (2017e)
Long March 11 (2015)
Minotaur-C (2017e)
Alpha (2017e)
Electron (2017e)
Antares (2013)
Vega (2012)
Long March 2D (1992)
CAB-3A (2017e)
Source: Company data, FAA, Goldman Sachs Global Investment Research. Source: Company data, FAA, Goldman Sachs Global Investment Research.
The flexibility offered by the new light rockets comes at a price. On a per kg basis, the cost to
launch to LEO is generally higher than existing solutions. Rockets like Arianespace’s Soyuz
have a payload capacity that makes them well suited to deploying a group of satellites along
a single orbital flightpath, as demonstrated by its role in launching the OneWeb constellation
of 650+ satellites, 32-36 at a time according to SpaceNews. Other rockets, like India’s PSLV,
are gaining note as dedicated CubeSat deployment vehicles. A single rocket deployed 104
satellites on February 15, 2017, a new record. Most of the payload were optical imaging
CubeSats for Planet Labs. The capability to deliver volume will support launch on heavier end
of the rockets typically tasked to LEO missions. Bundled smallsat payloads on these rockets,
while lacking the flexibility of single-payload launches, continue to provide the most
economical solutions. Some even larger rockets, primarily built for GEO missions, can be
tasked with LEO payload delivery. Furthermore, these large rockets are a particular threat to
the startups, since they are likely lower cost. As shown below, while the demand for light
rocket launchers could be significant, prevalence of larger rockets (able to lift thousands of
kg) could dramatically reduce the opportunity. ULA now offers free CubeSat launch slots as
secondary payloads on some flights.
Exhibit 21: Smallsat units (StratSpace) and upmass (GSe) per year and projected rocket demand sensitivities (units)
Demand could be significant for ultralight launchers, but a handful of larger vehicles could limit opportunity
Sample rockets: Vector-R Vector-H Arion 2 Electron LauncherOne Rockot/Vega Soyuz/Dnepr/PSLV Falcon 9/Ariane 5
50 100 150 300 500 2,000 3,000 20,000
Annual lift demand (kg)
3,000 60 30 20 10 6 2 1 0
6,000 120 60 40 20 12 3 2 0
9,000 180 90 60 30 18 5 3 0
12,000 240 120 80 40 24 6 4 1
15,000 300 150 100 50 30 8 5 1
18,000 360 180 120 60 36 9 6 1
21,000 420 210 140 70 42 11 7 1
24,000 480 240 160 80 48 12 8 1
27,000 540 270 180 90 54 14 9 1
30,000 600 300 200 100 60 15 10 2
*Volume constraints and idiosyncratic needs likely add to the theoretical opportunity shown here, which is only driven by payload weight
Significant opportunity LEO launch outlook: Given the rate and ease by which smallsats can be deployed, we are
for smallsat launch, but somewhat concerned about whether the market will be able to sustain the variety of new
larger vehicles could rockets that are poised to begin operations in the next two years, but the sheer volume of
reduce it
smallsats in backlog will create opportunity for a few providers. There has been a shift to
smallsats as a share of total launches, and we believe that they will grow off a low base.
Our view on individual smallsat launch providers becomes more favorable if particular
companies secure agreements with satellite operators or government bodies. For example,
Virgin Galactic will provide a constellation-patching solution for OneWeb in the event of
satellite failure. Other ultra-light launch providers could conceivably participate in the
current US government push to establish a reactive rapid-launch capability whereby it
could quickly replace satellite combat losses with emergency smallsats.
On the larger side of light rockets, we see a continued low rate of demand for launch—
likely less growth than in the ultralight market, with the exception of the deployment of the
OneWeb constellation by Soyuz. The manufacturers of the traditional light rockets typically
provide other launch and manufacturing services, with that diversified revenue profile
being key to our positive outlook on them.
The Problem: Smallsat operators face major launch delays, which can be particularly problematic because they are
often working from seed or Series A financing. Delays can tie up a large portion of that early stage funding for
potentially years. There are now ~1,500 smallsats planned for launch in 2018-2020, according to a StratSpace report.
Many are likely to fly together on ultralight launchers.
The Solution: Vector has designed and flown a class of rapid-launch low cost rockets. The company plans to achieve
cost efficiency by launching more than 100 rockets per year—and it already has at least that in backlog. The use of
smaller rockets allows satellite operators better scheduling and orbital insertions. Critically, their pricing and payload
capabilities are likely competitive with most paid-launches as secondary payloads on medium-heavy rockets, which are
the current options for launch.
The Bottleneck: If launch tempos are going to increase to the level Vector and other ultralight launch companies have
pointed to, ground infrastructure availability would become an issue. This is a good problem to have for an industry
that made use of the same pads for decades. Within the last decade, the number of commercial launch sites has grown
rapidly, with SpaceX, Orbital ATK, Blue Origin, Rocket Lab, and Vector taking steps to ensure regular launch capabilities.
Exhibit 22: Vector’s rocket is highly mobile and can launch from numerous sites, creating optionality
Source: Vector.
We see risk to the achievement of planned launch rates medium term to GEO. Short term,
launches are set to accelerate at SpaceX and Arianespace, as they launch the Iridium,
OneWeb, and SpaceX constellations; however, current satellite order rates and a planned
softening in capex among satellite service companies points to weakness on the horizon.
Furthermore, the SpaceX-Arianespace commercial launch duopoly will be broken around
that time by several new entrants, disrupting the GEO market. Together, these factors
suggest challenges for launch providers.
Given the size of launch in capex of satellite service, lower prices can help sustain that
industry short term before fueling growth in new applications and on-orbit capabilities.
Exhibit 23: Europe has been the largest commercial launch provider
Commercial launch revenues ($ mn) (LHS), and total commercial launches per year (RHS)
3,000 45
40
2,500
35
2,000 30
25
1,500
20
1,000 15
10
500
5
0 0
Given Europe’s relatively low-profile compared to the US and Russia in space, the scale of
the European commercial launcher industry is significant (the major difference is Europe’s
low military and civil involvement). In 2016, the US carried out 22 total launches, Russia
had 17, and China launched 19, while Europe launched 11. Rest of world launches brings
the total orbital launch volume to 83, with 3 failures according to the Space Launch Report.
America rising: From 2006-16, Europe has accounted for 45% of global commercial launch
revenues, compared with Russia at 25% and the USA at 19%. In the last few years, the
emergence of SpaceX and failures of International Launch Services rockets have led to
larger US share, creating a commercial launch duopoly between Europe’s Arianespace and
the American SpaceX/ULA. This can be seen in 2016, where the revenue split was broadly
even at 46%/47%.
GEO is stagnating, A tale of two orbits: Although GEO satellite orders have slowed, we expect launch activity
while LEO takes flight to be strong the next two years driven by LEO. Satellites take 2+ years to build so weak
orders take time to impact launch. Planned deployment of LEO constellations creates
opportunity, most already committed to a launch provider (Arianespace or SpaceX).
SpaceX will deploy its own constellation, so we do not factor that into the opportunity set
but it is a significant uptick in total launch volume. These windfall years consolidate the
market, and new entrants will largely be left with GEO commercial. However, the shift to
LEO could open new opportunities, as satellites there are shorter-lived.
Source: Company data, FAA, Gunter’s Space Page, Goldman Sachs Global Investment Research.
Commercial is highly Defense industrial base requirements support diversification: Looking beyond
concentrated, whereas commercial, launches have been fragmented; however, it is more concentrated than it first
government launch is appears—most rockets compete in their own national markets with little serious
more diversified competition. For idiosyncratic reasons, many are not very competitive for certain
globally (though commercial applications. Some diversity of offerings is likely to be restored with the next
concentrated generation of rockets, which could time with the commercial headwinds.
nationally)
Exhibit 25: Defense market is fragmented thanks to Exhibit 26: …while commercial market is increasingly
national support… concentrated
2016 market breakdown for launch to GEO 2017-19 commercial GEO market breakdown
H-IIA/Epsilon
(Japan)
5%
PSLV/GSLV
(India) Long March
10% (China)
20% Arianespace
28%
Delta IV (USA) Unidentified
8% 39%
Proton (Russia)
5%
Atlas V (USA)
Ariane 5 (Euro) ILS
18% 7%
13%
The new guy vs. the legacy guy - Falcon 9 vs. Ariane 5
Related reading The cost of access to space has come down more in the last decade than in the entire prior
period of space travel. The arrival of companies like SpaceX, offering launch services at
In a companion note also
discounts as high as 40%, has shaken the market. Whether these changes post an
published today, our
existential threat to the ‘old guard’ of providers is so far unclear, and Arianespace has
European A&D analysts
explore one of the maintained its share of commercial launches despite the newcomer SpaceX and its Falcon
byproducts of private 9. Eventually the question will be if expendable rockets can compete with reusable ones.
competition in space:
Airbus and Safran’s Exhibit 27: At first glance, the price difference is vast
decision to consolidate Estimated payload and pricing for Arianespace’s Ariane 5 vs. SpaceX’s Falcon 9
their Arianespace stakes Current Generation
into Airbus Space Ariane 5 Falcon 9***
Launchers. Max Payload to GTO* (kg) 9,500 5,500
Read the note Price ($ mn) 178 62
$1,000/kg 18.7 11.3
First Launch 1996 2010
Successes/Total** 87/91 30/33
Success Rate 96% 91%
*GTO: Geosynchronous Transfer Orbit
**Partial failures classed as failures
***SpaceX pricing assumes return of first stage for later reuse by the company
Source: FAA, Goldman Sachs Global Investment Research.
Pricing on a per kg basis is somewhat deceptive, since some rockets are more powerful
than needed or else have volume restrictions on payloads. On a per launch basis, SpaceX’s
Falcon 9 is ostensibly still very competitive, but it does not take the commanding market
share one would expect given its pricing on a per kg basis.
Ariane can carry two satellites at once, helping to balance the math: While the $/kg
rates assume a max payload, that is unlikely to always be the case. Ariane 5 is able to
better maximize it, regularly carrying two payloads per launch. It can also split costs
between two different customers (though that is not always easy to find).
Safety matters: While difficult to get an apples-to-apples price comparison, it is likely that
the Falcon 9 offers a less expensive service than Ariane 5 and other rockets. However, a key
mitigating factor is success rate. The numbers suggest a similar level of reliability, with
Ariane at 96% vs. Falcon 9 at 91%, but that gap is considerable in the launch community,
and timing matters. Since 2002, Ariane 5 has been accident free, with 77 consecutive
successful launches, while SpaceX has suffered two failures in the past two years.
90
80
70
60
50
40
30
20
10
Safety record justifies some pricing premium: A GEO satellite can be worth hundreds of
millions of dollars, making the difference between a 90% and a 100% launch success rate
substantial. According to some industry sources, the cost of insuring an Ariane 5 is 1/3 that
of a Russian Proton launcher. The Proton has suffered 5 failures in 6 years, including an
accident in 2015 that destroyed a MexSat payload insured for ~$390mn. Given rates of
about 5% for an Ariane 5, a 3x insurance rate would essentially add nearly $40mn to the
Proton’s price relative to Ariane, without factoring in lost revenue. SpaceX’s failed launches
would imply that they are likely seeing higher insurance rates as well.
Failures jeopardize physical assets of satellite operators and their operational plans/cash.
Failures can result in multi-month grounding for a family of rocket. ULA, another non-
equatorial medium-heavy launch company, estimates the average delay from operational
issues is 3-6 months, versus their average of 2-weeks.
ULA’s Atlas V has a perfect safety record, but its price is high. There are no scheduled
commercial Atlas V launches in 2017 vs. 2 in 2016. The rocket remains a mainstay of the US
government fleet, where launch demand is robust.
Location matters: Arianespace rockets launch from French Guiana, very close to the
equator. This means the launch is much more efficient. NASA engineers estimated that the
payload penalty associated with launching the Saturn V from Cape Canaveral vs. an
equatorial launch would be at least 20% for GEO and 80% for LEO.
The GTO capabilities quoted by SpaceX are for an orbit with an inclination of 27 degrees -
likely the most efficient GTO orbit given their less-equatorial launch sites, but not a
generally desirable one. Conversely, the GTO capabilities of Arianespace when launching
from the spaceport in French Guiana create nearly a direct route to GEO. Using the
numbers from ULA: a max payload of 8,856kg to an inclined GTO on its Atlas V equals
delivery of just 3,856kg to GEO. The gap between Arianespace’s GTO and GEO capabilities
should be nearly nonexistent. This essentially means that the Atlas V (and most rockets
launched from higher latitudes) appears more price competitive than it actually is.
Certain LEO orbits are more desirable, but the capability gap associated with different
launch sites is somewhat minimized. As such, we compare and analyze all rockets on a
cost-to-LEO basis (incl. in deriving our 10X launch cost reduction estimate) because it helps
neutralize the impact of the launch location, but it should be noted that the pricing
advantages of less equatorial companies like SpaceX and ILS narrow when competing for
launches to GEO, where most launch revenue is derived. This helps old-guard launch
providers stay competitive, even if their rockets are not.
Exhibit 29: Low-cost country offerings Exhibit 30: Launch costs have been falling (cost-to-LEO)
Cheaper than Western options from labor cost, state support But launch pad disparities narrow the gap between options
$12,000
India China Russia
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Source: Company data, FAA, Goldman Sachs Global Investment Research. Source: Company data, FAA, Goldman Sachs Global Investment Research.
Other competitors are catching up: With satellite operators heavily reliant on
Arianespace and SpaceX in the near term, other launch providers are becoming more
aggressive on price with current vehicles to stay competitive. Nearly all rocket models will
be replaced within the next 3-5 years, with new clean sheets adding further optionality and
pressure to the market. We think customers will reward diversification, even if some price
gap remains. SES and Eutelsat have indicated a commitment to ensure that the launch
industry does not become a duopoly between Arianespace and SpaceX due to concerns
about long-term pricing and reliability, supporting the introduction of new models. We
loosely divide the field into current and next generation rockets, finding that most
platforms will likely reduce the cost per kg to LEO by about half in the new generation.
Exhibit 31: Changing costs ($/kg to LEO) Exhibit 32: Changing costs ($mn per launch)
The first step function lower should decrease costs 38% on avg. Planned prices per launch fall about 31% on average
Prior generation Next generation Change Prior generation Next generation Change
Rocket $/kg to LEO Rocket $/kg to LEO % Rocket Price ($mn) Rocket Price ($mn) %
Proton $4,565 Angara A5 $4,167 -9% Proton $105 Angara A5 $100 -5%
Ariane 5 $8,476 Ariane 6 $4,762 -44% Ariane 5 $178 Ariane 6 $100 -44%
Falcon 9 * $4,654 Falcon 9 FT* $2,719 -42% Falcon 9 * $61 Falcon 9 FT* $62 1%
N/A N/A Falcon Heavy* $1,654 N/A N/A N/A Falcon Heavy* $90 N/A
H-IIA/B $6,818 H3 $5,000 -27% H-IIA/B $113 H3 $50 -56%
GSLV $9,400 LVM3 $7,500 -20% GSLV $47 LVM3 $60 28%
Saturn V $22,857 SLS $3,268 -86% Saturn V $3,200 SLS $500 -84%
Atlas V/Delta IV $11,093 Vulcan $6,378 -43% Atlas V/Delta IV $200 Vulcan $85 -58%
*Assumes no price increase if main stage not returned *Assumes no price increase if main stage not returned
Source: Company data, FAA, NASA, Goldman Sachs Global Investment Source: Company data, FAA, NASA, Goldman Sachs Global Investment
Research. Research.
Positive factors: David Quancard, COO of Airbus Safran Launchers, said 50% of the cost of
a rocket propulsion system lies in its industrial procedures, according to SpaceNews, which
is reflective of the operating leverage pervasive in the industry. The company won 21
launches for its Soyuz rocket over the next 2 years, an important uptick. SpaceX likely also
benefits from higher volumes from constellation launches.
Ariane 6 will replace Below we outline the 5 main ways that we believe costs can be stripped out of the Ariane 6
the Ariane 5 as the relative to the Ariane 5 with changes to production processes:
medium-heavy lift
offering by 1) Margin elimination through Airbus-Safran Launchers. Previously, Safran (and
Arianespace other suppliers) sold parts to Airbus, who assembled the launcher as the prime
contractor and then sold the completed product to Arianespace. Margin was
therefore taken twice on many components—now it is just once.
2) ASL synergies. Alain Charmeau, head of operations for space systems at Airbus,
said 80-90% of the cost of a rocket is manpower, making efficiency key. The supply
chain is changing too: the structures of the Ariane 5 are built in five places across
Europe. On the Ariane 6, the entire structure will be built in one factory.
3) Industry-led design. For the Ariane 6, the European Space Agency (ESA) has
handed over design authority to Airbus-Safran Launchers, which should allow
greater cost focus.
5) Integration with Vega. A slight but significant change is that the Ariane 6 will use
the same P120 solid rocket strap-on boosters used on Arianespace’s Vega C. This
means shared development costs and benefits from larger production scale.
SpaceX has also leveraged higher production volumes to reduce cost. Most rockets have
historically relied on one or two main stage engines—the Falcon 9 uses 9, plus a 10th in the
second stage. More engines introduce more risk, a key reason the Soviet Union’s 30-engine
N1 rocket never made it to the Moon. But engineering and manufacturing have advanced,
and making a large number of small engines brings an element of standardization and
mass production to rocketry.
Negative factors: Competition and the ongoing price war could diminish quality, passing
off risk short term to launch insurance providers. In February 2017, the Wall Street Journal
reported that the US Government Accountability Office was preparing a report detailing
that SpaceX’s fuel pumping fans were prone to cracking.
While the failure rate and possible system defects impact SpaceX launches, this may be a
factor of the corporate culture of iterative innovation rather than quality control or supply
chain; nevertheless, it could put the aggressive launch rate proposed by the company at
risk. While innovation is healthy in the long term, higher failure rates across the industry
could signify some saved R&D costs at manufacturers but a greater financial burden on
insurance providers and operators, plus a risk profile to launch that had not been there
previously.
New innovative Companies like SpaceX and Blue Origin represent fundamentally different approaches to
practices increase risk rocketry. To us, it appears the old guard, striving for reliability, kept to the adage, “if it ain’t
short term for broke, don’t fix it,” since changing out a single mission-proven system introduced
customers/insurance,
uncertainty to the next flight. The question now becomes whether the new companies’
but may be justified
long term approach can improve their rockets faster than possible failure rates drive away customers.
To date, we have seen little pricing discipline in the market, with Arianespace selling below
cost due to subsidies (according to the company) and SpaceX appearing to earn close to
no profit on its commercial launches (based on company documents published by the
Wall Street Journal; though NASA contracts are likely accretive). Over the last few years
Arianespace has operated at around breakeven, but with an annual subsidy from the ESA
near €100mn (this has halved over the last decade) while the ESA and CNES (the French
national space agency) jointly provide the launch infrastructure in French Guiana. The ESA
has stated that the Ariane 6 will need to succeed without an operating subsidy.
Pricing support: While costs are trending lower, there could be a reversal based on
existing weakness in the satellite services and manufacturing markets.
Consolidation & Risk: If the industry remains consolidated between two primary launch
providers, pricing could be stagnant if both are satisfied with share. We do not think limited
competition would slow innovation at SpaceX, since new entrants are on the horizon and it
has set ambitious long term goals (creating technologies and attempting missions that are
unprecedented), but it could potentially hold onto pricing to grow margins.
Government: We do not expect the same level of price compression in the government
market as we see in commercial because of the emphasis the government has placed on
reliability, availability, capability, and expendability. Government demand is likely to
remain strong, and the higher assurance required there will slow the downward pricing
trend. Given recent supplier issues, we think the government is committed to maintaining a
India is becoming a more common launch site for US and European payloads, though
normally requires a waiver. India is developing increasingly large rockets, with its new
LVM3 launcher a possible new competitor if regulatory patterns in smallsat launch are
repeated for GEO, but we do not think that is likely given the wide availability and
entrenchment of US competitors. Furthermore, expenses are rising as labor costs grow.
Success rates are not high and there is significant government support, lessening the
likelihood of international commercial use at the higher end of their capabilities.
We think the unique capabilities and likely price points of some of these platforms are
sufficiently compelling to potentially compete with the current Falcon 9 and Ariane 5. But
the market is likely not large enough to naturally support this many competitors.
1. Arianespace: Ariane 6
The challenge for Arianespace is what happens if/when the Falcon 9 becomes a reliable,
proven reusable platform at a significant discount. The ESA and Arianespace have
responded to the changing world via the Ariane 6 project, scheduled for its first launch in
2020. The plan is for a 62 (2 solid rocket boosters) and 64 (4 SRBs) version of the launcher,
with the 62 model primarily launching single payloads to GTO and the 64 launching dual-
manifested payloads.
Exhibit 33: Ariane 6 aims to narrow the gap to the Falcon 9 and Falcon Heavy
Estimated payload and pricing for Ariane 62 & 64 vs. Falcon 9 & Heavy
Future Models
Ariane 6 A62 Ariane 6 A64 Falcon 9*** Falcon Heavy***
Max Payload to GTO* (kg) 7,000 10,000 5,500 8,000
Price ($ mn) 80 100 62 90
$1,000/kg 11.4 10.0 11.3 11.3
First Launch 2020E 2020E 2010 2017E
Successes/Total** NA NA 30/33 NA
Success Rate NA NA 91% NA
*GTO: Geosynchronous Transfer Orbit
**Partial failures classed as failures
***SpaceX pricing assumes return of first stage for later reuse by the company
Industry estimates for the targeted price-per-launch vary, but average around $80mn for an
Ariane 62 and $100mn for a 64, but with a larger usable payload than Falcon Heavy. On
these numbers the Ariane 6 looks very competitive – assuming similar reliability to the 5.
Hampered by Politics? There are two significant political hurdles for the Angara to
overcome. First, part of the project’s appeal lies in its strategic independence. The Russian
government has spoken about the desire to have a fully-Russian and independently
launched rocket, whereas current rockets have a reliance on foreign (mostly Ukrainian)
component suppliers. The focus on cultivating an all-Russian supply chain, and using new
and untested suppliers, may be at odds with keeping down costs.
The second issue is the launch site. The Proton currently launches form Baikonur, in
Kazakhstan, leaving Russia exposed to expensive rent and lacking strategic independence.
As a result, the Angara will launch from Plesetsk, a few hundred kilometers north of
Moscow and near the Arctic circle. The result of this will be a negative payload impact to
GTO, leaving the Angara with a similar capability to the Proton. Plans to build a new launch
site in the far east of Russia have been put on hold as the government is prioritizing a new
launch site for the Soyuz-2. The Angara is likely to be cheaper than its European
competition, but the performance disadvantage from launching so far north will leave it
less competitive on the international market.
The United Launch Alliance, a joint venture between Boeing and Lockheed Martin, was
formed in 2006 as lower launch volumes, expanding costs and an ongoing legal battle
threatened the survival of the industry. The mainstay for its government business is a block
buy contract for Evolved Expendable Launch Vehicles (EELV). The current contract
guarantees the purchase of 36 rocket cores from ULA through 2018. Additionally, the US
government pays ULA as much as a billion dollars per year to maintain launch readiness.
Blue Origin’s liquid-fueled engines are significant—only one other American company,
Aerojet Rocketdyne, manufactures such systems today. Many current generation rockets
like the Atlas V employ Russian-made engines, which have come under scrutiny in
Washington as geopolitical tensions may compromise the supply of engines, and therefore
access to space. ULA’s Delta series, which has some overlapping capabilities with Atlas,
could likely serve as an alternative if ultimately needed. So far, the company has
successfully flown its BE-3 engine on its New Shepard suborbital vehicle—it appears to be
a contender as the primary upper stage propulsion for several next-gen entrants.
The BE-4 engine is likely to power ULA’s next-gen Vulcan rocket, as well as a proprietary
Blue Origin rocket, called the New Glenn. The engine’s capabilities likely place the New
Glenn rocket firmly among other heavy rockets, providing the thrust to deliver most
commercial satellites to geostationary orbit. The New Glenn rocket will employ 8 of these
engines. As with SpaceX, it is likely the company becomes its own customer, using launch
capabilities as a stepping stone to other economic drivers. Blue Origin recently booked
Eutelsat as its first customer for the New Glenn, with that flight in 2021 or 2022, and 5
flights for OneWeb.
rapid launch programs that could replace combat losses of satellites. Though first intended
for government launch, the cost, capability, and reliability could lead to commercial as well.
We think the NGL’s solid-fueled lower stages will offer more thrust early in the launch
sequence than vehicles like the Falcon 9, but less than rockets like the Delta IV Heavy,
which are much more expensive. This could create a Goldilocks scenario for OA, where its
rocket could lift payloads too large for Atlas V or Falcon 9-size launchers but too small to
fully justify a heavy launcher in both military and commercial markets. This rocket could
also be down-sized and replace the likely higher-cost Antares or synergistically assure OA’s
low-cost access to space for other programs like a Mission Extension Vehicle.
We expect the solid-booster design could reduce failure risk, the costs of which are largely
shouldered by the government, which essentially self-insures the launch and payload.
NASA has estimated the likelihood of space shuttle solid rocket booster failure was 0.001%
vs. the historical liquid failure rate of about 6%, though history suggests it is higher.
Cost competitiveness of solid fueled rockets. Low production volumes (there are fewer
than 100 launches per year globally) mean that launchers rarely reach economies of scale
and liquid-fueled vehicles are often over-engineered since testing opportunities are limited.
However, solid rockets are much more common, because of their military applications.
This creates more opportunity for testing, development, and spreading out cost. ATK built
solid rockets for the space shuttle, America’s nuclear arsenal, and now the exploration-
class SLS. ATK has more launches into space than SpaceX and ULA combined.
The comparatively high volume of solid rocket work, along with the experience gained in
past decades of refining the technology, suggests that OA can reduce cost on a likely-
cheaper system. If the company launches its MEV vehicles on this rocket, that would
further increase the production volumes and support lower costs, all else being equal.
Solid rockets are inherently cheaper. They consist of a casing filled with solid fuel, without
the same complicated propellant mixing and thrust vectoring associated with liquid fueled
engines and main stages. In 2002, legacy ATK was awarded a $429mn contract extension
for 70 reusable solid rocket boosters for the Space Shuttle. This implies a cost per booster
of $8mn in 2016 dollars. Thiokol (acquired by OA) received a contract in 1999 that puts each
booster at $34mn in 2016 dollars. A 1996 contract for 54 Pratt & Whitney space shuttle
boosters implies a cost per booster of $14mn in 2016 dollars. These prices imply
substantially lower cost/thrust ratios than liquid alternatives. We think a bottom-up cost
analysis points to a roughly $50mn-$70mn launch vehicle. We use $70mn in our
assumptions for commercial launch and $90mn for government launches, which tend to
command a premium. A lower price is certainly possible. Plus these could be made
reusable.
Thrust lowers cost per kg launched. We expect an NGL commercial launch price of
approximately $70mn with the capability to deliver up to 25,000 kg to LEO. In Exhibit 34, we
show the sensitivity of these estimates with shaded cells indicating a pricing discount
relative to a commercial Falcon 9 launch, which is likely the closest competitor. At both
Government and Commercial price points, we think OA could achieve a lower cost per kg
delivered to LEO.
We see reusability as a key shift in the industry that is beneficial for its long-term health,
enables missions like Mars landings, and improves the engineering knowledge base;
however, we see only minor benefits in the short term as launch volumes are likely
insufficient to support significant cost decreases and the current technology lacks
refinement. We assess the impact of reusability in the near term (rockets launched within 2
years), finding that the technology would likely expand SpaceX margins given the 10%
pricing discount the company suggests. We are bullish on the future of reusable rockets,
but there will be challenges to bring economics and safety to acceptable levels.
Re‐usable Falcon 9 Falcon 9
Revenue per launch today ($mn) 62
Costs per launch today ($mn) 62
First stage as % of total costs 70%
First stage costs ($mn) 43
Second stage costs ($mn) 9
Vehicle/payload integration ($mn) 2
Program support/SG&A ($mn) 6
Contingency ($mn) 2
Number of uses for first stage ($mn) 10
Amortized reused first stage costs ($mn) 4
Reusable rocket direct costs ($mn) 23
Refurbishment costs of rocket ($mn) 8
First stage savings ($mn) 31
Cost of reusable launch ($mn) 31
Savings seen by second‐use customers 10%
Pro‐forma sales price ($mn) 56
SpaceX margin with reused rocket 44%
If this 10% discount were applied to the first reused flight (subsequent flights may
necessitate additional discounting and incrementally higher refurbishment costs), the
reusable Falcon 9 would see an 11% discount to the Ariane 62 (on a per kg to GTO basis,
disregarding launch site payload penalties) vs the current gap of about 40% vs the Ariane 5.
We estimate reuse costs could be $8mn for SpaceX based on a 2-month refurbishment
period, amortized first launch discounts, one Merlin engine replacement, and about 10% of
the first stage’s value replaced for missions ordered now for flights in ~2 years.
We think it’s likely SpaceX does not offer lower price than competitors to gain radically
different market share than planned for 2017—a launch every other week. We think it could
be difficult to achieve this rate, and challenging for the supply chain. But even if achieving
this rate, it may prioritize margins over an even larger market share.
For the foreseeable future, US government launches will not fly reusable rockets, though if
the safety record of these rockets becomes that of ‘flight proven rockets’ vs. ‘second-hand
rockets,’ we expect the US DoD will revisit its stance.
We expect launch providers to struggle in this environment, but most are diversified
outside this industry or have strong government backing, so they are unlikely to disappear.
Following this period of compression, we expect lower launch costs to eventually stimulate
demand. Given the timing of launch payments and their significance for NPV calculations,
lower launch costs would help keep satellite operators alive during their own period of
turbulence near term and would enable a critical reduction of capex. Exhibit 36 shows that
for a representative $250mn satellite (spread over 3 years), a $50mn change in launch costs
changes the IRR 200 bp over the asset’s 15 year life when the asset generates a fixed
$50mn per year.
Exhibit 36: IRR of $250mn satellite services with different launch costs
Lower launch costs have significant impact on IRR
Investment Period Operational Period
Launch Cost Satellite Cost IRR -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
$50mn $250mn 12% -100 -100 -100 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50
$100mn $250mn 10% -100 -100 -150 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50
$150mn $250mn 8% -100 -100 -200 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50
If costs continue to Longer term, we believe rockets are gatekeeper technologies and that launch demand is
fall, they unlock new elastic. Lower launch costs open new applications, fueling additional demand. A positive
demand feedback mechanism is initiated as launch volumes pick up, further driving down cost.
Eventually, access to space would likely become routine.
We are already seeing the change, and companies like SpaceX and Blue Origin that
eventually seek to become their own customers with on-orbit businesses are planning for it.
In the case of SpaceX’s satellite internet constellation, costs have fallen by about 50%
which could mean the launch of at least 50 rockets a year, which would likely more than
triple the rate for the entire industry.
New businesses like tourism, asteroid mining, and space-based manufacturing are
becoming possible. The latter two, though still a way out, would be economic game
changers, while the former normalizes human spaceflight. With reusability a dominating
theme for the next decade, the following decade of rocketry may well be defined by the
impact of on-orbit fueling and manufacturing. Earth-to-GEO launch could become a thing
of the past. Instead, a diversified LEO economy that includes fueling and manufacturing
sectors could radically change the payload and power needs of the world’s rocket fleets.
The reusability debate will likely be resolved within the next 5 years, as manufacturers
attempt to prove out the technology’s viability. While most commercial operators do not
see the launch volumes sufficient to justify reusability, SpaceX is in the unique position of
becoming its own customer, likely demanding launch capabilities for 4,425 satellites in a
LEO constellation. If the constellation goes forward, reusability may as well.
As the cost-to-orbit falls, the connection between the terrestrial economy and the space
economy would strengthen. SpaceX caught the industry with its guard down over the last
decade. Companies that developed successful rockets did little and moved slowly to
change their platforms, leaning heavily on the reliability premium associated with proven
designs. If nothing else, the new Silicon Valley tech approach brings a new form of energy
to the sector, striving to continually improve existing designs. We see this as positive for
the overall industry over the long term.
SATELLITE MANUFACTURERS
Satellite Manufacturers: Rapidly changing
Manufacturing costs down ~100X in a decade
Headwinds likely to impact commercial
capabilities
Rapidly changing capabilities Government demand to remain robust
As satellites become less expensive, they become more viable communications conduits
and data gathering tools for new applications and customers. While the next several years
could be challenging for existing OEMs, as replacement demand and imbalances in their
end markets become headwinds, the use of satellites to provide global Internet access
changes the industry long term. What is a relatively small industry today is poised to bring
the space economy into the lives of half the planet on a near constant basis through
deployment of large Internet-providing fleets to the population currently without Internet.
We see this part of the industry as highly elastic, where lower-cost installed hardware
capacity can radically increase supply, driving down prices and fueling demand growth in
end markets. This in turn would be supportive of OEMs as more capacity would be
subsequently demanded.
especially in video. Plus, multiple threats are increasingly apparent on the horizon. This
tough outlook has led to our expectation of normalized capex cuts of about 20% industry-
wide for the next several years, a relative headwind to commercial satellite OEM revenue
as growth is achieved with less investment. Eutelsat, a major satellite operator, is
exhibiting capacity discipline by cutting all new data investment in their own fleet. Demand
profiles are changing as operators increasingly deploy shorter-lived cheaper assets that
better keep pace with technological change.
Relief from military demand will support most satellite manufacturers, given the military
satellite budget likely eclipses commercial spending. Civil should also remain strong
medium-term despite possible near-term headwinds to Earth sciences program at NASA.
Defense companies including Northrop, Raytheon and Harris are effectively 100% exposed
to government and predominantly commercial companies like MDA are trying to pivot
more towards government exposure, especially in the US.
There are about 1,500 satellites orbiting the Earth today, generally split between
commercial, military, government and civil (mostly academic). While about 1/4 of satellites
are for primarily military applications, we estimate that military assets draw roughly 3/4 of
spending. Satellite applications are extremely varied, but can be largely broken into
communications, observation, science, and technology development testbeds, regardless
of whether their purpose is military, commercial, civil, or government.
Earth
Government Observation
28% 26%
Commercial
41% Communications
50%
Navigation
7%
Military
24%
We expect growth in Internet, government, and mobility (maritime and aviation) demand,
but markets like video and legacy data are seeing significant pressure, and those are much
larger end markets today. Most LEO satellites that do not network with each other can only
provide service where ground terminals are available, meaning that maritime and aviation
markets are somewhat isolated from this supply growth.
Although capacity (below) has grown steadily, pricing and demand cycles in the end
markets have compromised order rates (Exhibit 42). Operators seeking to fill that capacity
can oversupply the market by cutting price—this lack of discipline is apparent today as
operators respond to an already tough pricing environment to meet debt payments
associated with their older space assets, which can have lower earnings potential.
Growth is poised to accelerate in mobility markets, to a mid double digit CAGR (Exhibit 41),
but we expect on-orbit supply to outpace it by a factor of ~10X if all planned LEO
constellations are deployed, though much of that capacity will be over land providing
Internet to rural areas and not target mobility markets, which are generally better served by
high throughput satellites. Inmarsat expects high throughput capacity to be ~3,000 gbps in
2020, with total demand not exceeding ~1,000 gbps. We are more bullish, seeing demand
at ~2,800 gbps for maritime and aero markets, in line with demand growth for mobility (but
capacity on several LEO constellations could provide superfluous supply).
Exhibit 41: Mobility demand is growing, but a handful of new satellites can meet the need
~3tbps on demand side by 2020
Scenario 1 Scenario 2 Scenario 3
2016 2020 2035 2016 2020 2035 2016 2020 2035
Large Commercial Aircraft
Total fleet size 21,500 24,198 37,700 21,500 26,133 54,329 21,500 28,182 77,755
Enabled aircraft 3,229 3,630 5,655 3,229 5,227 13,582 3,229 7,046 27,214
Penetration 15% 15% 15% 15% 20% 25% 15% 25% 35%
Speed (mbps) 40 80 240 40 120 480 40 160 800
Total bandwidth (gbps) 129 290 1,357 129 627 6,520 129 1,127 21,771
Business Jets
Total fleet size 20,000 21,649 29,136 20,000 22,510 35,070 20,000 23,397 42,137
Enabled aircraft 5,500 6,495 9,324 5,500 7,203 12,625 5,500 8,189 16,855
Penetration 28% 30% 32% 28% 32% 36% 28% 35% 40%
Speed (mbps) 40 80 240 40 100 400 40 120 600
Total bandwidth (gbps) 219 520 2,238 219 720 5,050 219 983 10,113
Cruise Ships
Total fleet size 312 326 377 312 362 455 312 398 547
Enabled vessels 312 326 377 312 362 455 312 398 547
Penetration 100% 100% 100% 100% 100% 100% 100% 100% 100%
Speed (mbps) 250 800 2,400 250 1,000 3,000 250 1,200 3,600
Total bandwidth (gbps) 78 261 905 78 362 1,364 78 478 1,970
Other Maritime Vessels*
Total fleet size 72,720 75,673 87,854 72,720 79,494 105,939 72,720 83,468 127,515
Enabled vessels 21,000 37,836 87,854 21,000 43,722 105,939 21,000 50,081 127,515
Penetration 29% 50% 100% 29% 55% 100% 29% 60% 100%
Speed (mbps) 10 20 60 10 25 75 10 30 90
Total bandwidth (gbps) 210 757 5,271 210 1,093 7,945 210 1,502 11,476
Total bandwidth (gbps) 635 1,827 9,771 635 2,803 20,879 635 4,090 45,330
Total growth vs 2016 188% 1438% 341% 3186% 544% 7034%
CAGR vs 2016 30% 15% 45% 20% 59% 25%
*Includes commercial freighters, fishing trawlers, and yachts
Video markets are unlikely to see much growth, and less likely to pass that growth along to
OEMs. Furthermore, capabilities are improving such that operators can do more with less,
allowing them to buy smaller GEO satellites as they replace 15-year-old technology.
The order rates for satellites are low, so the decision to delay or cancel just a few can make
a large difference in industry volume. If the services industry cannot absorb the capacity of
high throughput satellites, order rates at OEMs could be lower at cycle peak. Because
satellites are typically built over 2-3 years, orders are similar to launch rates, and most have
available capacity to begin work relatively soon after the order is placed.
25
20
15
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Satellite Age
Those beyond their expected lives are even less likely to be replaced on a one-for-one basis,
and many have already been formally replaced and now serve as reserve capacity.
While not a perfect proxy, the power of satellites is positively correlated to transponders,
and satellites launched today are about twice as powerful as the satellites reaching
retirement age. Transponders can also now do more with less power.
Exhibit 44: Satellites are now more powerful, reducing unit-for-unit replacement need
This accelerates transponder growth and points to split in market, reducing the middle of it
25,000
20,000
Power (watts)
15,000
10,000
5,000
0
1990 1995 2000 2005 2010 2015 2020
As capacity of new satellites grows, we expect satellite operators to face negative pricing.
We are concerned that satellites were ordered and launched in recent years with optimistic
end-market pricing outlooks. Older technology creates a higher cost basis for operators,
and with relatively new entrants with young fleets adding supply, existing operators are
forced to chase pricing lower, likely needing new satellites to lower their cost basis and
cover the financing costs of the existing fleet given the capability gap. Short term, this
actually could cause orders to pick up, but would not be due to healthy demand and it
would further pressure pricing in the end markets.
Video markets are likely to see continued replacement of old satellites at a fairly regular
pace, though it is likely that improved technology would allow operators to purchase fewer
and smaller satellites. That is also incentivized short term by the deficit of small satellites to
fill one of the positions on Ariane 5 launches, where lower launch costs meaningfully
change the ROI.
(3) Cheaper capacity
The price per capacity built is falling rapidly, which means that volume is now the new
mantra for the industry. Mass production of satellites and capacity densification in high
throughput satellites are highly disruptive. For satellite manufacturers, they mean revenue
headwinds, and for operators they mean lower operating costs with sufficient volume to
flood the market with oversupply.
When ViaSat launched ViaSat-1 in 2011 it was estimated to cost $500mn and deliver 140
gbps of bandwidth. At the time it effectively doubled the amount of bandwidth on orbit.
ViaSat-2 is set to launch this month and with 350 gbps of capacity at an approximate cost
of $625mn (including launch). It will represent more than a 50% increase in comparable
capacity.
700
600
400
300
200
100
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ka Ku
In the five and a half years between ViaSat-1 and 2, the cost fell from $3.5mn/gbps to
$1.8mn/gbps, a 50% reduction. The ViaSat-1 price point per capacity was already a
significant decline from prior models. ViaSat-2 is likely to generate about $45mn per month
of revenue according to its CEO, about 10X the amount from ViaSat1.
Exhibit 46: Estimated cost per installed gbps including satellite, launch, and insurance
Satellites are rapidly lowering their cost basis over today’s most advanced systems
$60
$50
$40
$30
$20
$10
$0
Inmarsat WildBlue-1 Intelsat Eutelsat Viasat-1 Viasat-2 OneWeb Viasat-3
GX Epic KaSat
The second of three future ViaSat-3’s is expected to cost $650mn, according to Eutelsat, a
partner. With more than 1 tbps, this implies the price per gbps would fall below $0.8mn in
the next 5 years. Although high throughputs align with the core competencies of OEMs,
they may not capture all of the manufacturing dollars. ViaSat purchased a Boeing satellite
bus for ViaSat-3, but is manufacturing the payload itself; and buses are increasingly
commoditized.
Military demand highly supportive: The same cost compression is not occurring on the
military side, primarily due to encryption and resiliency requirements. These satellites, like
some of the higher value commercial counterparts like Inmarsat GX have steerable
antennas, which allow the satellite to track priority ships or aircraft.
Costs for satellites From hand-crafted to mass production: The first mass production line for satellites is
themselves are down starting, likely driving costs even lower and becoming key to the future of Internet for half
~100X with mass the world’s population. The two most significant constellations in LEO are OneWeb (~650
production, causing
satellites initially, plus possibly 2,000 more) and SpaceX (approximately 4,500 satellites).
launch to become the
With approximately 10 terabits per second of capacity for the initial deployment of 650 at
most significant cost
OneWeb, these satellites could radically change the market. Airbus is targeting a price of
half a million dollars per satellite in OneWeb’s constellation, and with a plan for 10 terabits
per second, the implied cost per installed gbps is $45,000. However, that number is just for
the satellite—unlike GEO satellites, launch is likely to be the largest cost associated with
LEO fleets. In this case, we think it brings the total cost per installed gbps over $1mn. LEO
fleets are unlikely to be insured. LeoSat is moving toward launching 78-108 satellites made
by Thales. Importantly, LEO constellations allow for low latency communications, whereas
GEO satellites, which are situated further from Earth, have higher latency and are therefore
most suited to broadcast communications like satellite TV and radio. LEO enables everyday
two-way internet usage like VOIP where latency matters. For this reason, we see them
better able to serve everyday internet markets in hard-to-reach places.
There are no CubeSat constellations like those proposed by SpaceX and OneWeb, but we
think the throughput viability of the CubeSat as a communications platform is reaching
roughly breakeven, though power capabilities are likely still too low. Safety, reliability, and
fleet management are key factors holding the market back, but with the largest CubeSat
communications transponders now capable of generating more than 100 mbps at a likely
cost of ~$200,000, CubeSats could theoretically double 2015 on-orbit bandwidth through
asset capex of about $1.2bn ex launch, less than 10% the cost associated with all
competitively-procured satellites deployed in 2015. We expect that currently deployed
assets may eventually compete as transponder capabilities improve and costs come down
and technological hurdles are resolved. The ability of OEMs to build at increasingly low
cost is a greater headwind to sales than any existing demand weaknesses. As more
companies share the ambitions and capitalization for developing high capacity satellites
and constellations, the revenues attributable to manufacturers could be impacted.
A new dawn
While the commercial headwinds in the short term are strong (with low order rates <20
GEO satellites likely for several years), the importance of government and civil cannot be
overstated, and they will be highly supportive of the industry. We are not convinced that
the combination of unit price and the unit volume trends of satellites are going to be
sufficient to maintain revenue near current levels. The industry is fundamentally changing,
but we expect that when end-market pricing for data reaches something close to terrestrial
solutions, growth will return to satellite manufacturing, and that growth will be very strong
as pent-up elasticity is released. However, it is somewhat less clear how much of that
growth is in LEO or GEO fleets.
SATELLITE SERVICES
Satellite Services: Structural changes in supply & demand
Substantial growth in capacity
Negative pricing pressuring operators
Structural changes in supply & demand Capex-lite environment challenges OEMs
There is a growing disconnect in supply vs. demand near term for satellite services: TV,
radio, communications, and Internet. Certain markets are bright spots, but the threat from
new space-based capacity, plus changes in consumer behavior and technology on Earth,
are disrupting the equilibrium. Satellite operators with legacy assets and significant debt
are at risk, and likely add to a growing wave of oversupply as they aim to stay competitive
amid near term market weakness. Eventually, prices should fall low enough to stimulate
new sources of demand. Internet in sub-Saharan Africa can cost more than 100X as much
as in the US, but the average income is 35X lower. We see this, plus the price elasticity of
demand and limitations of terrestrial technology, as a large source of untapped demand
that will eventually propel the space economy forward to new highs over the long term.
SES– SES is increasingly seeking to diversify its business and increase exposure
to mobility and growing data in part through the recent acquisition of O3b (MEO
satellite fleet) and new HTS satellite launches. This appears to be aimed at
compensating for declining core video revenues and deflation in widebeam data
caused by increasing supply across the industry.
Eutelsat– Eutelsat is taking what we view as a pragmatic approach to what it
refers to as ‘low visibility around industry economics for data’. It has stopped all
data launches and is partnering with ViaSat (in EMEA) to pursue the mobility and
data opportunity.
Inmarsat– Inmarsat does not have any video exposure and is focused on mobility
(Maritime in particular). It is pursuing a largely organic strategy with its own HTS
ka band fleet (Global Express) completing existing L-Band satellites. In addition it
is partnering with Deutsche Telekom to build out a European Aviation network to
access the underpenetrated Inflight Wi-Fi market in Europe.
Exhibit 48: SES/Eutelsat primarily exposed to video, while Inmarsat is focused on mobility and Intelsat on a mix
Revenue breakdown by segment, 2016E (%)
Revenue exposures
Eutelsat SES (including O3b, RR Meda) Inmarsat (ex. Ligado) Intelsat
Central Other
Other, 3% Government, Other, 2% Aviation Services Government 1%
12% 16% 1% 16%
Government,
13%
Mobility, 7%
VAS, 6% Enterprise Network
9% Maritime Services
46% 45%
Enterprise,
13%
Data, 15%
Video, 62% Video, 71%
Media
Government 38%
28%
Ubiquitous coverage has always been a key driver for TV operators using satellite as a
means of transmission. We believe this will remain a key selling point, given the likes of
Sky are nationwide operators and this is important particularly for live events such as sport.
However, the underlying overall demand for transponder capacity is more unclear and
pricing is clearly higher than in other mature markets such as the US with limited
fundamental reasons aside from the lack of FTA broadcasters.
Drivers of Video
Positive Drivers Negative Drivers
Ubiquitous coverage Increasing OTT and fibre
Non‐user based pricing Increasing IPTV competition taking share from DTH
CPE a barrier to switching Pricing high versus more mature US market
Long term contracts/backlogs Compression
Concentrated supply due to orbital slots Falling channel counts
Increasing definition of channels (HD/UHD) Large DTH providers as end users
Low latency important for live sports etc Limited channels reliant on low latency
Exhibit 50: Core European transponder pricing remains high vs. other markets
Industry average revenue per transponder (US$ mn)
3.2
3.0 3.1
2.8
1.5 1.5 1.5 1.5 1.5 1.5 1.4 1.4 1.3 1.3
1.3 1.2
As better image quality is demanded, the number of channels per transponder decreases,
helping to offset the improvement in compression. HD channels require around five times
the capacity of SD channels, while UHD is four times HD. As fewer are transponders are
needed, satellites can become smaller and cheaper or larger and fewer. Old satellite can
receive software updates to support new formats, so this doesn’t necessitate new assets.
Exhibit 51: Determining the number of channels per unit of capacity; improving image
quality vs. compression format
Number of channels per transponder by modulation, format, and compression
Source: Eutelsat.
In Exhibit 52, we show the relative MPEG-4 penetration at SES and Eutelsat compared to HD.
Eutelsat management have highlighted the opportunity they have to accelerate HD
penetration across their video capacity (Hotbird) to the peer levels.
Exhibit 52: SES typically has a more advanced end-user vs. Eutelsat
MPEG-4 and HD penetration (%)
60.0%
45.0%
32.5%
20.0%
MPEG‐4 Penetration HD Penetration
SES Eutelsat (Hotbird)
As the exhibits below show, in a number of regions Internet Protocol TV (IPTV) penetration
is growing, with investment in fixed networks (by both incumbents and cable operators).
Fixed network operators are able to offer higher speeds such that they are increasingly
positioned to offer more advanced OTT services. We believe this shifting pattern of
viewership moves the balance of power more towards fixed network operators as opposed
to satellite operators given the availability of other distribution mechanisms and ability to
reduce DTH channel counts.
Exhibit 53: Europe pay TV penetration continues to grow Exhibit 54: IPTV increasing in all the big EU countries
Pay TV penetration by markets, % of TV homes Internet Protocol TV (penetration by market (2015 vs. 2010)
100% 60%
90%
50%
80%
70% 40%
60%
50% 30%
40%
20%
30%
20% 10%
10%
0% 0%
Italy
Spain
Germany
France
UK
US
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
UK Italy France Germany
Spain US Sweden IPTV penetration (2010) IPTV penetration (2015)
Source: SNL Kagan, Goldman Sachs Global Investment Research. Source: SNL Kagan, Goldman Sachs Global Investment Research.
Data – Pressure in existing data businesses – Seeking growth in mobility and Aero
Operators are continuing to see the impact of wider pressure on satellite data pricing (per
MHz), in particular existing widebeam data revenues given the continued increase in
industry supply driven by High Throughput Satellite (HTS) launches. HTS satellites
represent the new frontier in the satellite industry, offering more data at a far lower implied
cost compared to traditional wide beam satellites. We expect the continued increase in
industry supply to continue, and highlight Eutelsat’s estimation for a further 50% decline in
pricing in the next five years. However, there remain a number of relatively nascent
markets in Europe in both Aero (lack of inflight Wi-Fi), rural consumer broadband (lack of
fiber) and elements of maritime/mobility which operators are targeting for growth.
Exhibit 55: Eutelsat has guided that data pricing will decline by 50% in five years, with
some compensation from higher volumes
Eutelsat guided evolution of data revenue (data guided to shrink to 10% of total revenue)
Source: Eutelsat.
We believe that relatively high barriers to entry for global satellite operators’ domains will
remain, noting the nature of their global offering and large fleet size, orbital slot access,
long-duration contracts and the current use of the satellites (satellites themselves suited
particularly to their current use – not easy to replicate).
We note historic volatility, and differences, between the capex levels of satellite operators over recent
years. Accordingly, we consider valuation using normalized capex/sales for the listed European
satellite operators.
Exhibit 56: Normalized and 10-year average, GSe and company guidance capex/sales (%)
50%
Eutelsat SES Inmarsat
40%
40%
35%
32% 30%
30% 30% 31%
30% 27%
25%
20%
10%
0%
10 yr avg. capex /
Normalised GSe
2017E
2018E
2017E
2018E
capex / sales
10 yr avg.
curent sales
TV’s rise was meteoric with the number of DBS subscribers growing at a CAGR of 13%,
eclipsing the 2% annual growth of the overall pay-TV sector in the US. The initial appeal of
satellite TV vs. cable and free ‘over-the-air’ television was simple: more channels. DBS
operators were also leaders in innovation, being among the first pay-TV providers to offer
high-definition channels and digital video recorders. Over the last two years, however, the
number of DBS subscribers has started to come back to Earth, declining by about 1%
annually, a trend we expect to continue through the end of the decade.
Nov 2016
Jul 2015 AT&T launches
AT&T acquires DIRECTV Now Feb 2017
40 Google unveils
DIRECTV
YouTube TV
35
30
Feb 2015
DISH launches
Mar 2016 1H17
25 Sling TV Hulu's targted
Sony launches
PlayStation Vue launch of its
live streaming
20 service
15 1994
DIRECTV
launches
service
10
5 1995
Dish Netw ork
launches service
0
Source: Company data, SNL Kagan, Goldman Sachs Global Investment Research
The space race gives way to a flood of streaming services back on Earth
Satellite TV is not The key driver of the decline in satellite TV subscribers, as well as an overall decline in pay-
just being disrupted TV subscribers, is the rise of streaming video delivered over the Internet. As of year-end
by new space-based 2016, nearly 90% of consumers with a postpaid wireless plan had a smartphone, and as of
technologies, it is year-end 2014, 94% of households had access to a broadband service offering download
being disrupted by speeds of at least 10 Mbps, according to the FCC. Based on this growing connectivity,
terrestrial Internet- consumers can increasingly watch whatever they want, whenever they want, wherever
based video services
they are without a pay-TV subscription.
This is driving ‘cord-cutting’ (i.e., consumers disconnecting from traditional pay-TV service),
but perhaps more significantly a generation of ‘cord-nevers’ (i.e. consumers who have
never subscribed to a traditional pay-TV service). For example, According to a survey from
Magid Associates, 34% of millennials that don’t subscribe to pay TV are cord-nevers, which
is 10 percentage points higher than the total population (24%). So, traditional satellite TV is
not just being disrupted by new space-based technologies, it is being disrupted by
terrestrial Internet-based video services.
them to benefit from the rise of streaming video by providing the broadband access, even
if it cannibalizes their video services. It also provides a hook into the consumer that they
can leverage to sell bundles, perhaps including their own streaming video options.
DBS operators, by contrast, have difficulty leveraging their satellite TV networks to deliver
competitive broadband speeds. This has caused the two providers of nationwide satellite
TV services – Dish Network and DIRECTV – to pursue diverging strategies. Dish has ramped
up its investment in its own streaming service (Sling TV) while also looking to position
itself for continued growth in wireless data usage by investing in mobile spectrum licenses.
AT&T, DIRECTV’s parent, has pursued a strategy of vertical integration as it looks to
provide bundles of wireless, broadband and video (satellite and streaming) to households.
Extra Space?
With AT&T making DIRECTV the focus of its residential video strategy, the overall decline
in satellite TV subscribers should be moderate for at the least the next few years. But, as
AT&T upgrades its wireline network to fiber and its wireless network to 5G, we expect the
company to increasingly embrace streaming video as a core service.
This raises an interesting question as to what will happen to the infrastructure supporting
DBS services in the US as customers migrate away from these platforms. With Dish
focusing more on rural markets vs. DIRECTV, the two companies are less in competition
with each other than with other traditional pay-TV providers (e.g., cable) and streaming
services. This has caused management of Dish to suggest that perhaps the two companies,
which had attempted a merger in 2001 that was ultimately blocked by regulators, should
consider sharing infrastructure. For example, during the company’s 2Q16 conference call,
Charlie Ergen, Dish’s CEO, suggested that Dish and DIRECTV could achieve a “fair amount
of synergy” by combining their use of backhaul connectivity into the broadcasters and
perhaps combine their advertising resources.
Whatever the outcome, DBS providers – the shooting stars of TV’s space age – no longer
seem to have the "right stuff” as video enters the Internet age.
Where Say’s law becomes space law: build it and they will come
Supply is the source of demand according to Say’s law. We think availability of low-cost
satellite Internet, especially, will usher in a new era of relevancy for the space economy.
Longer term, the key disruptor for satellite data services would likely come from ultra-high
throughput satellite fleets and LEO/MEO. OneWeb, SpaceX, LeoSat, Google and others are
all potentially involved in launching new LEO fleets with hundreds of satellites and overall
throughput towards 10tbps per fleet. Clearly the launch of such fleets would see overall
global satellite capacity multiply significantly. The launch of such fleets given the LEO
nature will not be without regulatory challenges, but unlike previous launches (such as
Teledesic) the financial stability of the sponsors is generally better.
We think ultimately prices will fall enough to tap new sources of demand. As demand for
Internet in developing parts of the world is elastic, this becomes a long-term growth area
for space companies as the half of the world’s population without Internet access could
access Internet via Space, creating high growth opportunities for satellite operators and
OEMs when pricing falls.
We see the current negative trend in insurance rates as supportive of GEO satellite services,
and therefore traditional OEMs, relative to those operating in LEO, since GEO operators
more frequently insure their assets. As overall rates compress, we think this is supportive
of lower quality launch and satellite systems, as the difference between premiums for
launchers is also likely to compress. This lowers the barrier to entry for new designs.
Competitive dynamics:
There is a large spread between the peak value at risk for the largest commercial launches
and the average insured commercial launch. According to XL Catlin, top-value satellites
plus launch are about $750mn while the average is ~$250mn per launch. This means that
the industry needs at least $750mn available to cover large satellite launches, but typically
the market only requires $250mn, creating additional competition and driving down
insurance rates as risk periods are largely sequential. The difference between the high end
and average has exerted pressure on the prices paid for coverage, more than halving them
over the last 15 years to between 5% and 10%, in line with historical failure rates.
Exhibit 59: Total launch and failure rates of rockets Exhibit 60: GEO launch and failure rates of rockets
Rockets appear to be getting safer… …but failure rates among the largest rockets remain at 7%
100 12% 60 25%
80 10% 50 20%
8% 40
60 15%
6% 30
40 10%
4% 20
20 2% 10 5%
0 0% 0 0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Launch attempts Failure rate (%) Launch attempts Failure rate (%)
As the insured values of the largest satellites continue to climb, and average values
remaining relatively constant, the gap is widening. The number of GEO satellites launched
to orbit will likely be low for the next few years given the current order outlook. According
to XL Catlin, large constellations typically do not pay for insurance, or else have a high
deductible, due to differences in their business model. As such, we see little incremental
opportunity from the pending deployment of OneWeb and SpaceX constellations.
While insurance rates are generally trending lower, new rockets and satellite technology
can introduce more risks. During the first launch, XL Catlin sees about 1/3 of rockets fail. By
the third launch, the probability of failure decreases to just over 20% and by the 12th, the
probability falls to about 10%. Commercial launches are normally insured, limiting the
burden of a failed launch for the operator, but the lost revenue is not covered. Rockets like
the Ariane 5 and the Falcon 9 carry premiums of approximately 6% and O3b reportedly
paid an 8.6% premium for launch and first year coverage of 4 satellites launched on a
European Soyuz spacecraft according to SpaceNews.
Solid rocket failure rate estimated at 0.001% vs. historical liquid rate at 6%
The US government self-insures its launches, meaning that failure rates are a key
consideration in pricing. NASA has estimated that the likelihood of space shuttle solid
rocket booster failure was 1 in 100,000 vs. liquid rockets at about 1 in 20. Solid rockets are
far simpler than liquid alternatives, meaning less risk. De-risked launch enables pricing
premiums, contributing to our positive view on solid-fueled systems. Defense payloads can
cost billions of dollars and are vital to national security. Reduction in the likelihood of
failure is often worth far more than the theoretical breakeven math based on risk and
payload plus launch costs. As such, in Exhibit 61, we show just the theoretical minimum
accepted pricing delta between two rockets of different risk profiles.
Exhibit 61: Illustrative sensitivity table for launch risk vs. premium ($mn)
Implied de-risking premium for government launches of assorted payloads
0% $0 $0 $0 $0 $0 $0
risk differential
Relative failure
1% $1 $3 $5 $8 $10 $20
3% $3 $9 $15 $24 $30 $60
5% $5 $15 $25 $40 $50 $100
10% $10 $30 $50 $80 $100 $200
20% $20 $60 $100 $160 $200 $400
We think a representative payload plus launch cost for a national security launch on an
NGL, Atlas V, or Falcon 9 would be between $500mn and $1bn. Both the Atlas V and Falcon
9 have good records, with the Atlas V claiming a ~10% better success rate. If the payload
plus launch were valued at $800mn, this would imply a financial breakeven decision when
the Atlas V costs $80mn more than a Falcon 9 due to the lower risk profile of the Atlas.
Growth: Recent years have seen substantially more space startup companies formed and
substantially more venture capital put into the sector compared to any time in history.
Who?: A lot of investment has been from or into well-known players in the sector – like Google
and Fidelity investing in SpaceX or SoftBank investing in OneWeb. But there have been dozens
of smaller investment firms putting money into smaller privates, as well.
Major players: Investors: Bessemer, DFJ, SoftBank, Fidelity, Google; Recipients: SpaceX,
OneWeb, Planet Labs, Rocket Lab.
April 4, 2017 Profiles in Innovation
Venture in Space
As a category, Space generated nearly $1.4bn in venture investment in 2016, having never
reached over $125mn in venture investment annually prior to 2014. We’ve seen this trend
being primarily driven by large, consolidated funding rounds that have created new
applications for Space technology that range beyond building rockets, from launch vehicle
platforms to data collection and service providers.
Over the last 3 years, Space VC funding has increased on average 195% to over $1bn yearly,
driven by larger one-off VC rounds and higher relative density of rounds >$10mn. If
anything, this growth is likely understated given the direct founder-led investment in high
profile efforts, like Jeff Bezos’s Blue Origin and Richard Branson’s Virgin Galactic, may not
be fully captured in public figures.
1400 30
1200 25
1000
20
800
15
600
10
400
200 5
0 0
2009 2010 2011 2012 2013 2014 2015 2016
Given the high barriers to entry and capital costs required to enter the space market, as
well as the early stage relative to other innovative categories in realizing positive returns
on business operation costs, we are not surprised that deal count has remained low
relative to a rapidly growing capital investment base.
As early stage as the category is, there has not been substantial large scale M&A activity.
No large cap public company has acquired more than one Space company in the last 5
years, according to CB Insights. Take Google’s acquisition of Terra Bella in 2014, for
instance, a company that focuses on opening up the world’s data through micro-satellite
imagery and video. In 2017, Planet Labs, one of the larger private players in the space,
announced the acquisition of Terra Bella from Google, highlighting the current private
consolidation of a market that has slowly expanded beyond building rockets for space
exploration.
This is an early vertical both on a capital investment and deal count basis, with large spikes
in each of the last three years highlighted by the Blue Origin, SpaceX, and OneWeb VC
rounds ($500mn, $1bn and $1.2bn, respectively) driving investment growth. As this vertical
matures and applicable technology allows companies to better gauge future returns on
investment, we believe corporates, particularly in the Aerospace & Defense sector, may
take more interest in private Space companies.
Exhibit 63: VC Funding in Space Startups by Investment Exhibit 64: Average and median deal size of VC
Stage investments in Space startups
Funding amount in $mn; excludes SpaceX, OneWeb and Blue Deal size in $mn
Origin funding deals
250 80
70
200
60
50
150
40
30
100
20
50 10
0
2010 2011 2012 2013 2014 2015 2016
0
2010 2011 2012 2013 2014 2015 2016 Average Deal Size Median Deal Size
Seed/Accelerator Series A Series B Series C Series D Series E+
Source: CB Insights, Goldman Sachs Global Investment Research. Source: CB Insights, Goldman Sachs Global Investment Research.
SpaceFlight Industries is a services company that connects interested parties with launch
vehicle providers, making Space more attainable than years past to those who have the
means and interest of getting there. Companies like Rocket Lab aim to provide the launch
vehicle themselves. Finally, there are companies, like Moon Express and Planetary
Resources, aiming to use technology to harness extra-terrestrial resources for the benefit
of the planet (exhibit 65).
Spire Satellite-powered data collection company Series B Jun-15 $40 $70 United States San Francisco
Data
Planet Labs Data collection through differentiated quality in satellite imagery Series C - II Apr-15 $23 $196 United States San Francisco
Planet Labs Data collection through differentiated quality in satellite imagery Series C Jan-15 $70 $196 United States San Francisco
Resources
Moon Express Focus on harnessing lunar resources for the benefit of life on earth Series B - II Jan-17 $20 $48 United States Cape Canaveral
Planetary Resources Robotic space exploration for resource retrieval Series A - II Nov-16 $15 $49 United States Redmond
Planetary Resources Robotic space exploration for resource retrieval Series A Oct-15 $21 $49 United States Redmond
Rocket Lab Rapid delivery of small satellites into orbit through it's Electron launch vehicle Series D Mar-17 $75 $75 United States Los Angeles
Spaceflight Industries Space services and solutions, including launch coordination for satellites Series B - II Jun-16 $25 $45 United States Seattle
Services
FireFly Space Systems Launch company for small satellites Series B Jun-16 $19 $22 United States Cedar Park
Astroscale Space Debris removal technologies Series B Mar-16 $35 $43 Singapore
Spaceflight Industries Space services and solutions, including launch coordination for satellites Series B Mar-15 $20 $45 United States Seattle
OneWeb Plans to put >600 satellites in orbit for low-cost global Internet access Unatt. Dec-16 $1,200 $1,719 United States Arlington
Hardware
Axelspace Micro-satellite company with applications in weather monitoring Series A Sep-15 $15 $15 Japan Tokyo
SpaceX Manufacture and launch of advanced spacecrafts Series D Jan-15 $1,000 $1,185 United States Hawthorne
Blue Origin Aerospace developer / manufacturer Unatt. Aug-14 $500 $526 United States Kent
Exhibit 66 shows the VC investors that have funded Space companies, recently.
Exhibit 66: Investors in top 15 VC rounds >$15mn
Company Latest Funding Round Investors
Rocket Lab Bessemer Venture Partners, Data Collective, K1W1, Khosla Ventures, Promus Ventures
Airbus Group Ventures, Bharti Enterprises, Hughes Network Systems, Qualcomm Ventures, SoftBank Group, The Coca-Cola Company,
OneWeb
Totalplay,Virgin Group
Spaceflight Industries Mithril Capital Management, Razors Edge Ventures, RRE Ventures, Vulcan Capital
Bold Capital Partners, Bryan Johnson, Conversion Capital, Grishin Robotics, Larry Page, OS Fund, Seraph Group, Sinovation Ventures,
Planetary Resources
Space Angels Network, Vast Ventures
Energy & Environment Investment, Global Brain Corporation, Japan Science and Technology Agency, Mitsui & Co., SBI Investment, Seibu
Axelspace
Shinkin Capital, SKY Perfect JSAT Corporation, SMBC Venture Capital
Spire Bessemer Venture Partners, Jump Capital, Lemnos Labs, Promus Ventures, RRE Ventures
For example, according to the Federal Aviation Administration, there was a 55% yoy increase
in the number of launch applications filed by private companies in FY16, which include a
wide range of space vehicles including small-payload rockets and space vehicle carrier
aircraft. VC investors are attracted to the space industry financially as startups focus on areas
that had previously been protected from competition and are not yet fully explored.
Investors are not just funding startups in relatively well established industries within space
such as development of satellites and launchers, but also less established space ventures
such as space mining and tourism. As we have seen in other sectors, large incumbents in
the space industry could start looking outside their internal R&D teams and at space
startups for innovative solutions. Therefore, many exits in the space industry could come
from acquisitions rather than IPOs.
Exhibit 67: Space M&A & IPO Exits Exhibit 68: Top Investors in Space Startups
# of exits # of participated deals in 2014-to date
18 11
16
14 6
12
3 3 3
10 2 2 2 2 2 2
0
2009 2010 2011 2012 2013 2014 2015 2016
Source: CB Insights, Goldman Sachs Global Investment Research Source: CB Insights, Goldman Sachs Global Investment Research
Beyond VC
Capital markets, beyond venture capital, have been active to support space-related
companies. According to Bloomberg, over 260 deals have been announced in the industry
since 1994, including transactions among space hardware manufacturers, satellite
operators and technology companies.
20
15
10
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Bloomberg.
There has also been increasing support for Space startups, defined as space companies
that started as angel- and venture capital-backed startups. According to Bryce Space and
Technology, these companies have received support from multiple sources of capital, from
angel investors to bank debt financing, as shown in exhibits 70 and 71.
Exhibit 70: Investment in Startup Space companies Exhibit 71: Investment in Startup Space companies
$ mn Number of investors
3,500 100
90
3,000
80
2,500 70
60
2,000
50
1,500
40
1,000 30
20
500
10
- -
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Seed / Prize / Grant Venture Capital Private Equity Acquisition Public Offering Debt Financing Banks Public Markets Corporations PE Firms VC Firms Angel Investors Altruists
Source: Bryce Space and Technology. Source: Bryce Space and Technology.
One important source of funding for satellite launches has been the United States Export
Import Bank (ExIm). Historically, ExIm has provided over $5.7bn in loans and guarantees
for satellite launches, services and insurance.
Exhibit 72: United States Export-Import Bank support for Space items
In US$
Country Authorization Date Obligor Supplier Product Interest rate Loans Guarantees
Russia 1/8/1998 Vnesheconombank Hughes Space & Communications International Inc. Delta II Launch Vehicle n/a n/a 122,829,547
Brazil 7/20/1999 Empresa Brasileira De Telecomunicacoes Hughes Space Communications Co. Satellite / Integration n/a 65,051,988 n/a
Thailand 2/28/2002 Shin Satellite Public Co. Ltd. Space Systems/Loral Inc. Satellite n/a n/a 184,511,149
Mexico 4/17/2003 Satelites Mexicanos S.A. de C.V. Space Systems/Loral Inc. Satellite and Related Equipment / Ground station n/a n/a 149,799,409
Malaysia 11/23/2004 Binariang Satellite Systems SDN BHD Boeing Satellite Systems Communications Satellite System n/a n/a 137,718,019
Malaysia 6/2/2006 Binariang Satellite Systems SDN BHD Boeing Satellite Systems Satellite Communications (Capital Increase) n/a n/a 8,321,051
Malaysia 6/8/2006 Measat Satellite Systems SDN BHD Orbital Sciences Corp. Satellite Communications n/a n/a 102,537,321
Spain 12/10/2009 HISPASAT S.A. Space Systems/Loral Inc. HISPASAT 1E Geostationery Satellite (Launch Insurance) n/a n/a 160,560,390
United Kingdom 12/3/2009 Avanti Communications Group PLC Marsh & McLennan Companies Geostationery Satellite 3.37% 215,621,649 n/a
Azerbaijan 4/27/2011 Azercosmos OJSCO Orbital Sciences Corp. Satellite n/a n/a 116,615,338
Luxembourg 11/18/2010 SES S.A. Space Systems/Loral Inc. Satellite 2.47% 158,004,263 n/a
Spain 12/9/2010 Hispasat Canarias S.L.U. Space Systems/Loral Inc. Satellite n/a n/a 228,286,420
United Kingdom 12/16/2010 Inmarsat Investment Ltd. Boeing Satellite Systems Inc. Satellite 3.11% 700,000,000 n/a
Australia 7/19/2012 Jabiru Satellite Ltd. Lockheed Martin Space Science Systems Co. Satellite n/a 281,110,000 n/a
France 11/3/2011 Eutelsat Communications S.A. Space Systems/Loral Inc. Satellite n/a 66,243,347 n/a
Boeing Space and Intelligence Systems
Mexico 7/12/2012 Government of Mexico Satellites n/a 921,830,504 n/a
Orbital Sciences Corp
Vietnam 9/27/2012 Government of Vietnam Lockheed Martin Space Science Systems Co. Satellite n/a 118,081,740 n/a
Australia 1/17/2013 Jabiru Satellite Ltd. Lockheed Martin Space Science Systems Co. Satellite and Launch Insurance (Amendment) n/a 13,220,000 n/a
Hong Kong 11/15/2012 Kingsbridge Ltd. Space Systems/Loral LLC (SSL), et. al. Satellite and Launch Insurance n/a 179,609,546 n/a
Boeing Satellite Systems Inc., Space Exploration
Hong Kong 11/15/2012 Kingsbridge Ltd. Satellite, Launch Services and Launch Insurance n/a 291,060,659 n/a
Technologies Corp. (SpaceEx), et, al.
Space Systems/Loral LLC (SSL), Space Exploration
Hong Kong 5/30/2013 Asia Satellite Telecommunications Co. Ltd., et. al. Satellite, Launch Services and Launch Insurance n/a 343,292,904 n/a
Technologies Corp. (SpaceEx), et. al.
Israel 8/23/2013 Space Communication Ltd. Space Exploration Technologies Corp. (SpaceEx) Satellite, Launch Vehicles and Launch Insurance n/a 105,436,551 n/a
Spain 1/17/2013 Hispasat Canarias S.L. Orbital Sciences Corp. Satellite and Launch Insurance n/a n/a 87,149,423
United Kingdom 11/28/2012 Avanti Communications Group PLC Orbital Sciences Corp. Satellite (Amendment) n/a 6,657,868 n/a
Australia 2/10/2014 Jabiru Satellite Ltd. Lockheed Martin Corp. Communications Satellite n/a 9,869,000 n/a
Space Systems/Loral LLC (SSL)
Bulgaria 12/12/2013 Bulgaria Sat AD Communications Satellite and Launch Services n/a 150,542,286 n/a
Space Exploration Technologies Corp. (SpaceX)
Hong Kong 11/26/2013 Asia Satellite Telecommunications Co. Ltd. Space Systems/Loral LLC (SSL) Communications Satellite and Launch (Credit Amendment) n/a 2,231,470 n/a
Israel 11/1/2013 Space Communication Ltd. Space Exploration Technologies Corp. (SpaceEx) Geosynchronous Satellite Launch Services n/a 618,751 n/a
Mexico 2/20/2014 Innova S.A. de R.L. de C.V. Orbital Sciences Corp. Communication Satellite n/a 79,583,800 n/a
United Kingdom 7/14/2014 Inmarsat Investment Ltd. Boeing Satellite Systems Inc. Communications Satellite n/a 185,907,209 n/a
United Kingdom 9/29/2014 Viasat Technologies Ltd. Boeing Satellite Systems Inc. Communications Satellite n/a 524,929,198 n/a
Bulgaria 5/14/2015 Bulgaria Sat AD Space Systems/Loral LLC (SSL) Satellite (Credit Amendment) n/a 4,547,714 n/a
TOTAL 4,423,450,447 1,298,328,067
EC ‘Fund of Funds’: The EU has begun to make efforts to improve this situation, with 2016
proving to be a significant year for European venture capital. The EU Commission launched
the Venture Capital ‘Fund of Funds’ in 2016, committing to funding up to 25% of the total
investment, capped at €400mn. This suggests that the total potential fund could reach as
high as €1.6bn, potentially benefitting technology and engineering firms in the space sector.
Seraphim Space Fund: Also in 2016, the London-based Seraphim Capital launched the
Space Fund, the largest space-focused European VC fund to date. The fund is aiming to
raise £80mn for space technology investing, and has already received £50mn from the
British Business Bank and a range of other global investors. The ESA is supporting the fund,
acting as a facilitator and suggesting investments in return for some compensation. These
developments indicate some early steps towards bridging the funding gap with the US.
In addition, the privatization of space technology is driving the restructuring of the current
regulatory framework for regulating new business models, licensing emerging ventures,
and managing conflicts when companies from various geographies are involved in space
working on similar missions. Also, areas within the space industry such as space tourism
or asteroid mining are in very early stages and it is difficult to easily estimate the returns
on investments in startups targeting these areas.
Public to private: Exploration used to be the domain of governments, but is increasingly being
privatized, adding to the addressable opportunity.
Entirely new industries: New technologies are creating new industries (on-orbit data plays,
tourism, mining, on-orbit manufacturing), which are important sources of growth and progress.
Major players: Northrop Grumman, Lockheed Martin, Planet Labs, Spire, Orbital ATK, SpaceX,
Blue Origin, Boeing, Bigelow, Sierra Nevada, Planetary Resources, Deep Space Industries, Virgin
Galactic.
April 4, 2017 Profiles in Innovation
The greatest headwind to more exploration dollars is political will. NASA now accounts for
less than 0.5% of federal discretionary spending after half a century of decline. The agency
remains the most popular government agency according to the Pew Research Center (on a
basis of favorable minus unfavorable ratings), with more than 2/3 of participants citing a
favorable view. While it may require realized or potential scientific achievement
strengthening the relationship between public and political support in order to drive a
higher NASA budget, a return to Bush-era spending levels would increase the NASA
budget 50% and to Clinton-era levels, 100%.
Exhibit 73: NASA budget ($mn) Exhibit 74: NASA budget as % of federal discretionary
The budget is growing… …but less than the federal budget
$25,000 1.2%
Share of Total Budget Authority
1.0%
$20,000
0.8%
Dollars ($mn)
$15,000
0.6%
$10,000
0.4%
$5,000
0.2%
$0 0.0%
FY1976
FY1978
FY1980
FY1982
FY1984
FY1986
FY1988
FY1990
FY1992
FY1994
FY1996
FY1998
FY2000
FY2002
FY2004
FY2006
FY2008
FY2010
FY2012
FY2014
FY2016
FY1976
FY1978
FY1980
FY1982
FY1984
FY1986
FY1988
FY1990
FY1992
FY1994
FY1996
FY1998
FY2000
FY2002
FY2004
FY2006
FY2008
FY2010
FY2012
FY2014
FY2016
FY2018e
FY2020e
FY2018e
FY2020e
Rising competition with Russia and China geopolitically may spread to space. While
cooperation is likely to continue, competition towards scientific achievement may fuel a
civil space race not unlike during the Cold War. This dynamic would also strengthen
political will to support NASA. The Space Foundation speculates that China’s spending
may already surpass US space spending.
Commentary from the new Trump administration suggests that it has set its sights on new
national achievements in space, opening the possibility that space spending could outpace
budget growth or that dollars may shift from Earth-science work to more private sector-
accessible procurement for deep space exploration.
While civil space has not surpassed the growth of the overall US budget, it remains a
$19bn line item and significant source of opportunity for federal contractors. More
importantly, the operations, exploration and technology development funded and
conducted by civil agencies are foundational to human progress, a smoothly operating
economy, and the growth of new industries and products.
A program involving two probes, Voyager 1 and Voyager 2, to explore the outer Solar System. Launched in
Spacecraft: Jet Propulsion Laboratory
Voyager Program 1977, are now exploring the interstellar space - the furthest that a man-made object ever reached. Shutdown $3.7bn until 2012
Launcher: NASA
expected to start in 2020.
Robotic spacecraft to explore the outer corona of the Sun, will orbit the Sun at a distance of less than five Spacecraft: Applied Physics Laboratory
Solar Probe Plus (SPP) $1.4bn
times its diameter, the closest any spacecraft has ever reached. Launch expected in August 2018. Launcher: ULA (Delta IV Heavy)
Two spacecraft launched in August 2012 to study the radiation belts around Earth, which can disrupt satellites Spacecraft: Applied Physics Laboratory
Van Allen Probes ~$670mn
and cause power grid failures. The program has important practical applications. Launcher: ULA (Atlas V)
The first launch system capable of reaching deep space carrying a crew and support systems. The SLS will $10bn through
Space Launch System Boeing
carry Orion, and is designed to support missions towards asteroids and other planets, like Mars. 2017
Spacecraft designed to enable deep space human exploration missions, and potentially supporting a crew on
Orion Spacecraft Lockheed Martin $6bn through 2017
longer duration missions.
NOAA Program Description Manufacturer Program cost
Geostationary Operational Environmental Satellite (GOES) spacecraft deliver weather forecasts and provide
GOES-R Series Lockheed Martin $10.2bn
short-term advance weather warning products to the commercial, educational, and public sectors.
Jason-3 International earth observation satellite that provides ocean surface measurement. Thales Alenia Space ~$200mn
Joint Polar Satellite System is a constellation of polar-orbiting, non-geosynchronous, environmental satellites Ball Aerospace, Orbital ATK, Raytheon, Exelis,
JPSS $11.3bn
designed to provide data used in weather forecast models and climate monitoring. Northrop Grumman
Polar Follow On Follow on to JPSS. $2.9bn until 2021
DSCOVR Earth observation and weather satellite launched in 2015, orbits a sun-earth lagrangian point. SpaceX ~$140mn
Space Weather Follow On Follow on to DSCOVR. ~$760mn
While the immediate dollar impact is not always clearly definable when conducting
research and exploration missions like those to Mars, these missions could yield species-
steering discoveries in energy, health, and climate change that could have profound
economic implications. We look at some of the more immediate relationships between
space agencies and the top lines of exposed companies.
Exhibit 79: Astrophysics and James Webb Telescope Budget FY2017 ($mn)
$1.3bn each year committed to NASA’s celestial observation ventures
FY2017 NASA Presidential Budget Request FY2016 FY2017 FY2018 FY2019 FY2020 FY2021
Astrophysics and James Webb Telescope 1,329 1,436 1,295 1,297 1,316 1,342
Astrophysics Research 188 229 236 236 249 252
Cosmic Origins 199 199 198 197 196 210
Physics of the Cosmos 108 100 88 94 98 94
Exoplanet Exploration 64 210 148 309 373 451
Astrophysics Explorer 150 129 91 156 204 186
James Webb Telescope 620 569 534 305 197 150
Source: NASA.
Source: NASA.
NASA’s Exploration Systems Development Division develops programs that will enable
deep space exploration. This division coordinates three programs to procure the spacecraft,
the rocket, and the ground systems that will enable human flight beyond the Moon, into
asteroids and Mars: Space Launch Systems (SLS), Orion Multi-Purpose Crew Vehicle
(scheduled to fly primarily on SLS), and Ground Systems Development & Operations.
The SLS is scheduled to launch in 2018 without a crew in its first launch, but there is now a
NASA study looking at the feasibility of adding crew to that launch. We see this move as
potentially aiming to accelerate NASA’s relevancy as a valued exploratory agency in the
eyes of Washington. The first crewed flight was scheduled for 2021. With that timeline, it
would be possible for a commercial operator to make a significant enough achievement to
potentially challenge NASA’s position. Regardless of that outcome, we maintain a view
that NASA will be critical in governing, regulating, and advancing the new space economy.
We maintain that the agency plays an important role in exploration and see the potential
value of SLS/Orion launches as a substantial economic opportunity, especially if launch
tempos pick up alongside political will for exploration, which the Trump administration has
indicated. The agency has a more nuanced view of the tasks, risks, and steps associated
with exploration that ensure it is conducted in the most responsible manner. While it may
not be the first, it is important to note that innovators like SpaceX are made possible by
NASA and the billions they have spent helping the company develop its systems and
commercial viability. For NASA, Mars is not the only goal or worthwhile step forward. It is
a big one, but there are intermediate steps it will take that are nearly as significant from
both an economic and an achievement standpoint.
Source: NASA.
European Exploration
Compared to NASA’s near $20bn budget, the ESA’s 2017 spending of €5.7bn (c.$5.4bn) is
modest, but a relatively large chunk (11%) is allocated to exploration (~$600mn vs NASA’s
~$9bn; Exhibit 82). Much of this is covered by Aurora, the long-term plan for European
exploration of the solar system. So far this has included ExoMars, launched in 2016, which
put a research satellite into orbit around Mars, though its experimental lander crashed on
the planet’s surface. Next in 2020 is a planned Mars rover, followed by a robotic sample-
collection mission in the 2020s and finally a human mission in the mid-2030s. Alongside
Aurora are proposals for a lunar mission and even a base on the Moon by 2030.
General Budget
4%
Basic Activities
4%
Space Science
9%
Launchers
19%
Prodex
1% Navigation
18%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
COTS 1 COTS 2 / 3 Orb D1 Spx 3 Spx 5 Spx 8 Spx 10 Spx 13 Spx 16 Spx 19 Spx 22 Spx 25 Spx 28 Spx 31
Spx 1 Spx 2 Spx 4 Spx 6 Spx 9 Spx 11 Spx 14 Spx 17 Spx 20 Spx 23 Spx 26 Spx 29 Spx 32
A ONE Spx 5 Spx 7 OA 5 Spx 12 Spx 15 Spx 18 Spx 21 Spx 24 Spx 27 Spx 30 Spx 33
Orb 1 OA 4 OA 6 OA 7 Orb 9E Orb 11 Orb 12 Orb 13 Orb 14 Orb 15 Orb 16
Orb 2 OA 8 Orb 10E SNC 1 SNC 2 SNC 3 SNC 4 SNC 5 SNC 6
Orb 3 Spx DM1 Spx DM2 USCV 1 USCV 3 USCV 5 USCV 7 USCV 9 USCV 11
OFT USCV 2 USCV 4 USCV 6 USCV 8 USCV 10 USCV 12
CFT
COTS Commercial Orbital Transportation Services: Development of commercial cargo transportation systems Rescheduled
CRS 1 Commercial Resupply Services: cargo transportation for the International Space Station Unsuccessful
CRS 1E Commercial Resupply Services Extension
CRS 2 Commercial Resupply Services 2
CRS 3 ? Commercial Resupply Services 3?
Antares Antares test flight
CCtCap Commercial Crew Transportation Capability: commercial development of a crew transportation capability
CTS Crew Transportation System: intended to conduct regular flights to the International Space Station
FY2017 NASA Presidential Budget Request FY2016 FY2017 FY2018 FY2019 FY2020 FY2021
Space Transportation 2,849 2,758 2,475 2,119 2,144 2,214
Commercial crew 1,243 1,185 732 173 36 36
Crew and Cargo - including CRS 1,606 1,573 1,743 1,946 2,109 2,178
Source: NASA.
EarthObservation
Earth Observation:–Eyes
Eyesininthe
thesky
Sky
Earth observation is gaining traction in the big data world. The implications and end uses
are significant, though it is unclear whether the commercial industry is ready to stand on
its own. Companies are forced to differentiate themselves from free services provided by
the US government, usually through higher resolution imaging and frequency of revisits,
which means high capex. Fortunately for operators, government demand growth is strong,
growing at about 8% per year in the US. This has supported some of the higher resolution
operators, but we worry the commercial space is crowded, especially on the private side
where VC funding has been an enabler of businesses that are likely not profitable yet.
Consolidation may be necessary for some to be viable, and those who find the broadest
use cases are most likely to succeed.
Applications
Data from imaging satellites helps underlie autonomous vehicle systems (for HD mapping),
5G deployment, ship tracking, and agricultural assessments, but these systems have a long
For more on our autos way to go before they become serious revenue generators. Our Autos research team sees
team forecast that
autonomous vehicles as commercially available by 2025, tower placement planning for 5G
autonomous driving
could leverage other existing methods, legally-operating ships are already tracked, and
will spur a $100bn parts
market by 2025, see farmers have access to free data from government sources.
Cars 2025: Vol. 3:
Operators and users are typically forced to choose between imaging quality and frequency
Monetizing the Rise of
of revisits. Some companies are attempting to develop a joint architecture whereby lower
Autonomous Vehicles.
cost assets can make a binary observation – whether change has occurred in an image--
and then communicate that to a larger satellite which would take a closer look. While both
satellites and drones are riding a new wave of imaging and data demand, they do not
necessarily compete with each other. Unmanned aerial vehicles obtain far more detailed
imaging, with resolutions providing survey-grade imaging. Satellites can build a better
macro picture faster, but sacrifice resolution. As such, we expect the two industries to
develop in a complementary fashion.
The Problem: We spoke to big-data startup Spire, which operates a fleet of satellites for maritime and aviation tracking,
as well as precision meteorology. There are large swathes of ocean and sky that are beyond terrestrial tracking systems,
leaving a door open to potentially illegal activities. Sequestration in Washington has delayed the next generation of
weather satellites to a critical point, according to the GAO and industry participants.
The Solution: While there are existing services for tracking and meteorology, and many of them are free, Spire brings
new levels of precision and competitive solutions for both public sector and private customers. The company is able to
detect ships that have turned off their transponders, often a sign of illegal activity, pinpoint responsibility for insurance
providers, and gather better data that meaningfully improves weather models. It also sells data to hedge funds seeking
better data in these markets. The company has deployed a sophisticated constellation of smallsats the size of a shoebox
that bounce signals off the ionosphere as a detection method and study distortions in GPS signals to better forecast
weather.
The Bottleneck: Launch of smallsats is a challenge, particularly when the target fleet size is in the hundreds of satellites
and replaced every few years. Schedule delays at launch providers are common, typically resulting in year-long delays.
The company is forced to plan for delays, spreading launches across rockets and launch sites, and hedge on orders and
scheduling.
Exhibit 87: Spire’s Lemur 2 in orbit Exhibit 88: Spire’s Lemur 2 on a table during testing
Tourism:– Normalizing
Tourism Normalizinghuman
humanspaceflight
spaceflight
In the first step towards opening Space to anyone, entrepreneurs are developing vehicles
designed to bring tourists to the edge of space. This end market will stress the launch
industry, testing its ability to build and launch people safely, cheaply, and quickly. While
we view the industry as critical to normalizing human spaceflight, we see it struggling to
take flight amid safety concerns in the near-term. Tourism may catalyze further investment
in space, clean energy, and climate science. Astronauts often speak about the impact of
seeing the Earth from space on their life and perspectives. Adding more people to those
ranks would only help fund programs, organizations, and businesses devoted to
exploration and Earth preservation.
Background
A tourist seat on a Soyuz rocket costs about $35mn, but Sir Richard Branson believes he
can lower that cost 140X—to $250,000 a person—for sub-orbital travel. Jeff Bezos’s Blue
Origin will likely compete at a similar price point for sub-orbital flights. In the orbital market,
SpaceX and Boeing are possible entrants, using their NASA-funded commercial crew
capsules for tourism. Bigelow Aerospace has proposed an inflatable space station as a
destination—a space hotel per se.
Most ventures focus on sub-orbital flight, just beyond the Karman Line, 100km from the
surface of the Earth and the conventional edge of space. That is about 10X the altitude
flown by most commercial aircraft.
The fly away cost of most of these launch vehicles is not public. As seen through NASA’s
commercial crew program, the cost of developing an orbital crew capsule capable of space
travel is in the billions. Developing even a small rocket or aircraft to launch it can cost
hundreds of millions. Amortizing that cost across rockets that generate less than a million
per flight seems unrealistic. Suborbital rockets are advantaged because they do not reach
the same speeds as orbital systems, and therefore do not need to endure the same heat
damage. Although this makes suborbital rockets better candidates for low cost reusability,
that cost is still not insignificant.
Regulations
The US government proposed a set of rules in December 2015 to regulate space tourism,
including screening procedures and emergency training requirements. Any company
offering to launch paying passengers from American territory on a suborbital rocket needs
to be licensed by the FAA. This process focuses on public and property safety, and is
regulated under the Code of Federal Regulations, Title 14, Chapter III.
The Problem: If the average person is going to space, rocket reliability is going to have to improve. A few failures could
jeopardize the industry. Additionally, the FAA will be needed to maintain a degree of safety assurance for participants
and third parties.
The Solution: We spoke with XCOR Aerospace, a rocket propulsion company that is expanding towards being a launch
solutions provider, with a particular focus towards tourism. Reusability is a natural way to prove reliability—an engine
that has been flown before is one less likely to fail, so long as no part is less reusable than the number of times it has
been used and the quality control associated with refurbishment and part testing is just as rigorous as for the first
launch. The FAA appears to be heavily embedded with launch providers and actively engaged with ensuring a
supportive yet responsible regulatory environment for human spaceflight.
The Bottleneck: The challenge with rockets traditionally is that they are very difficult and expensive to test—this means
that a $500mn launcher like SLS may never fly before it is human rated. How many launches with what success rate
need to happen before the general public lines up to fly? We think both numbers need to be very high. The only viable
way to achieve this is with a very simple clean-burning reusable engine, enabling fast turnaround and low maintenance.
XCOR believes they have developed such an engine. It is capable of flying 7-8X per day at very low cost. This would
enable to company to run hundreds of test launches in the time a more traditional light rocket system could do a dozen.
SpaceMining
Space Mining:– Unlimited
Unlimitedresources?
resources?
Space mining could be more realistic than perceived. Water and platinum group metals
that are abundant on asteroids are highly disruptive from a technological and economic
standpoint. Water is easily converted into rocket fuel, and can even be used unaltered as a
propellant. Ultimately being able to stockpile the fuel in LEO would be a game changer for
how we access space. And platinum is platinum. According to a 2012 Reuters interview
with Planetary Resources, a single asteroid the size of a football field could contain $25bn-
$50bn worth of platinum.
Water
The Space Shuttle’s fuel supply was essentially water with its atoms rearranged. And space
is full of it. Deep Space Industries has even developed a thruster that simply heats water
into steam as a propellant, making it safe to fly as a secondary payload when other
propellants cannot. According to Planetary Resources, it takes 54 liters of water (fuel) to lift
one kg to LEO. Lifting that same kg to GEO requires just 4 liters, but each of those requires
54, compounding the size of rocket required. This means that an orbiting ‘gas station,’
using water from asteroids, could radically change the way we interact with space and cut
launch costs significantly.
Metals
Successful asteroid mining would likely crater the global price of platinum, with a single
500-meter-wide asteroid containing nearly 175X the global output, according to MIT’s
Mission 2016. Furthermore, the less valuable metals from asteroids can be ground into a
powder and used in a 3-D printer. Asteroid mining could very quickly supply an emerging
on-orbit manufacturing economy with nearly all the raw materials needed.
Capex
While the psychological barrier to mining asteroids is high, the actual financial and
technological barriers are far lower. Prospecting probes can likely be built for tens of
millions of dollars each and Caltech has suggested an asteroid-grabbing spacecraft could
cost $2.6bn. We expect that systems could be built for less than that given trends in the
cost of manufacturing spacecraft and improvements in technology. Given the capex of
mining operations on Earth, we think that financing a space mission is not outside the
realm of possibility.
Regulations
The exploration and extraction of resources from celestial bodies – like minerals found on
the Moon – are generally regulated by the Outer Space Treaty of 1967, which limits claims
on celestial bodies but allows for resource extraction. In the US, former President Obama
signed Commercial Space Launch Competitiveness Act, which opened the door for US
companies to explore, extract, and recover space resources.
The Problem: Dreams of colonizing other worlds are likely not attainable without industrial infrastructure in space.
Extracting raw materials from asteroids is just the first part—the space economy ultimately needs people.
Little research has been conducted to study the minimum gravity needed for people to survive long term in space. Zero
gravity can be devastating on the human body, but what is the tipping point between the Earth’s gravity and zero that
triggers health problems? Astronauts are carefully selected for physically intense, relatively short, missions on the ISS,
but as plans are developed for everyday people to dwell in space, the issue of gravity comes front and center.
The Solution: After acquiring the raw materials from asteroids, Deep Space Industries intends to process the metals
into a powder and employ additive manufacturing technology to print a rotating space station capable of simulating
different gravities. This station would be key to determining the biological limitations of life on Mars or the Moon.
Furthermore, it would likely become a hub for the economy off Earth. As an intermediate step the company may seek to
become the first orbiting ‘gas’ station, extract high value minerals, or supply a potential early-stage on-orbit
manufacturing base.
The Bottleneck: Low launch costs are an enduring theme in the future of the space economy. Launching a handful of
people per launch at a cost of tens of millions of dollars will never be economically viable. Deep Space Industries
suggests that launch costs need to come down by at least 2 orders of magnitude to normalize space travel and the
space economy. Tourism is a good first step, but scale will matter. Low launch cost primes the on-orbit economy, but
ultimately the expansion of the on-orbit economy will reduce the need for missions from Earth.
“The ability to safely and cooperatively interact with satellites in GEO would immediately revolutionize military and
commercial space operations alike, lowering satellite construction and deployment costs and improving satellite
lifespan, resilience, and reliability.”
Looking forward, we do not dismiss the idea of space-based manufacturing, assuming that
the development of asteroid mining ventures is successful and capable of supplying the
raw materials. For now, access to and from LEO is expensive, but efforts to normalize
space travel through reusable rocketry are underway and may eventually succeed in
lowering launch costs enough for an orbiting manufacturing sector to develop.
The opportunity
Geostationary satellites cost hundreds of millions of dollars. They carry enough fuel to
operate for about 15 years and are built with electronics rated for about 20 years, creating
an opportunity to extend mission life. Extending a satellite’s life by a third would change
the return profile for satellite operators in a highly competitive environment, especially as
end market pricing pressures their financials amid structural changes in the industry (as
discussed in the satellite services section).
The solution
Orbital’s solution attaches to host satellites running low on propellant and uses its own fuel
and propulsion system to keep the host satellite at its station. At present, the technology
does not involve a transfer of fuel or mechanical repairs; however, these are logical next
steps, which would open new opportunities for subsequent platform development.
Operators may be willing to accept slightly higher MEV costs since it eliminates uncertainty
of filling capacity in an already oversupplied market while further paying down debt.
We model the operator breakeven based on satellite size, location, pricing, and fill rate, as
well as OA MEV annual pricing.
Our model employs an interaction term ‘pricing multiple’ that is the fill rate multiplied by
the annual revenue for each given satellite terminal at a 100% fill rate. It estimates the
average revenue per transponder for a satellite. High value locations with a high fill rate
see a higher pricing variable. Low value locations with low fill rates have values less than 1.
That value is multiplied by the number of transponders for estimated satellite revenue and
divided by $18mn per satellite (mid point of $15-20mn) for mission extension services. The
resulting opportunity surface is shown in Exhibit 89. Dark blue shading shows areas of
increasingly lower return compatibility for the MEV and satellites of a given profile.
assets, which have spare capacity. However, the oldest satellites tend to be smaller with less
return potential. Operators could use the MEV to extend new satellites with greater capability.
As operators come under pressure to maintain returns amid the current pricing/capex
environment, the MEV would be a critical offset and competitive advantage. This implies the
MEV is well placed to benefit during what we see as the ongoing supply ramp and downward
trend in pricing. Exhibit 90 compares the cash returns associated with a typical geostationary
satellite with and without the MEV. Our European Telecom research team estimates that the
representative satellite plus launch is about $300mn and generates about $40mn-$60mn cash
post interest. It is likely that OA’s servicing vehicle will target similar or larger satellites. If this
were to materialize, the MEV could improve the returns of a particular investment by ~100 bp,
as well as postpone capex, expand margins, de-risk, and improve interest coverage—key
considerations for operators today, particularly those that are distressed.
Exhibit 90: Traditional satellite operator returns vs. returns using MEV
MEVs can drive higher returns and margins, while reducing capex
Satellite operations without MEV
Investment Period Operational Period
Launch + Satellite Cost IRR -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
$300mn 12% -100 -100 -100 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50
Space-based industry
It is still a long way off, but satellite servicing technologies developed by OA, MDA and civil
space agencies, along with advances in 3D printing, are paving the way for on-orbit
manufacturing. In conjunction with the emergence of asteroid mining companies that
could supply the raw materials, production capabilities in space would radically change the
math of the space economy and open new possibilities. Just as SpaceX’s launchers appear
to be a means to a goal of a large LEO communications network, Blue Origin’s New Glenn
rocket may be the same for an eventual LEO manufacturing economy.
Manufacturing in space would allow others in the space economy to bypass launch to LEO,
fundamentally changing the capabilities of the assets in space. Products like large antennae
that would not otherwise fit in a rocket capsule could be assembled in orbit and joined to
more sophisticated parts built on Earth. On-orbit gas stations could fuel newly assembled
rockets, which could be built with negligible concern for weight and propellant. High
pollution industries could be relocated to orbit to avoid harmful effects on the environment,
though the environmental impacts are likely not well understood. These systems will be
critical to eventually colonizing Mars if and when possible. We are decades out from seeing
classic industry, but the building blocks are being assembled today.
It is crowded up there: More countries and more commercial players moving into space is
causing congestion which adds risk.
Space moves Defense numbers more than you might think: Space is a larger portion of the US
Defense budget, growing at a faster rate, than we think the average A&D investor realizes.
Major players: Northrop Grumman, Lockheed Martin, Boeing, Raytheon, Harris Corp., and
SpaceX.
April 4, 2017 Profiles in Innovation
In 2016 the Deputy Secretary for Defense commented that the Pentagon did not have
For more on the
tactics and doctrine in space until recently. As space becomes a renewed national priority,
growing military
market for drones, see
investable themes will emerge. The US defense and intelligence budget for space is
Drones: Flying into the broadly classified, but we estimate there is $22bn in addressable annual spending, growing
Mainstream, also from at a 6% CAGR over the next 5 years based on our bottom-up analysis. Because most of the
our Profiles in budget is classified, we think investors overlook the importance of this sector, and the
Innovation series. changes that are unfolding.
We look at how the US military and its allies are responding to varied threats with $350bn-
$400bn of friendly defense, civil, and commercial assets. With a size beginning to rival the
US Marine Corps, the space warriors of the US military are becoming an increasingly
important line item on Capitol Hill and within the Pentagon.
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Pentagon (Unclassified)
Officially, the Air Force, Navy, DARPA, and the Missile Defense Agency will spend $6bn on
Space in 2017. Of the $3bn in procurement, most is spent on four headline programs:
Evolved Expendable Launch Vehicle: The EELV program assures the US national
security apparatus access to Space for medium-to-heavy launches. Beneficiaries:
SpaceX, LMT, BA. Opportunity: $1.8bn in 2017.
Advanced Extremely High Frequency system: The AEHF program builds a 4-
satellite communications constellation in GEO that expands secure capacity and
data rate capabilities beyond the current system. Canada, the UK, and the
Netherlands are participating partners. Beneficiaries: LMT. Opportunity: $905mn in
2017.
GPS III: The Global Positioning System provides continuous navigation for military
and civil users globally. The new satellites expand current military and civil
capabilities. Beneficiaries: LMT, RTN, LLL, COL. Opportunity: $569mn in 2017.
Space-Based Infrared System: SBIRS is comprised of four GEO satellites and two
elliptical orbit satellites used to provide initial warning of ballistic missile launches,
as well as other ISR capabilities. Beneficiaries: LMT. Opportunity: $544mn in 2017.
Procurement budget authority ramps steeply FY2016-FY2018 (Exhibit 92), which likely
supports margin expansion amid a growing top line through at least 2020. Within classified,
we think the line is blurred with Research, Development, Test & Evaluation (RDT&E) and
margins converge.
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2016 2017 2018 2019 2020 2021
RDT&E Procurement
Pentagon (Classified)
The Air Force official classified budget in the FY2017 request was $33.4bn. That is more
than 2X the Air Force spend on unclassified aircraft ($14.8bn). Not all is spent on Space, but
we believe a large portion is (~$10bn). Classified dollars are everywhere, and can be
outside the line items that describe them. As such, we believe there could be considerable
upside beyond the most-visible numbers. We estimate go-forward numbers for the
classified budget based on bottom-up analysis and historical growth rates, estimating that
about a third of the Air Force classified budget is spent on Space. While a commercial
satellite generally costs in the hundreds of millions of dollars, America’s most expensive
spy satellites are known to cost in the billions of dollars. Launch costs on heavy-lift rockets
like the Delta IV can reach mid-single-digit hundreds of millions of dollars.
Exhibit 93: National Reconnaissance Office Exhibit 94: Estimated addressable share of NRO budget
$10.9bn estimated in FY2017 The majority is likely addressable to Defense contractors
Research and Facilities &
Technology Logistics
Enterprise
Management
Enterprise IT
Geospatial Geospatial
Systems Operations
Intelligence Intelligence EO 18%
Radar
Mission Ground
Stations
Launch
Geospatial/Signal
Intelligence
Procurement
RDT&E
Sensitive 82%
Technical
Collection
Source: Washington Post, FAS, Goldman Sachs Global Investment Research. Source: Washington Post, FAS, Goldman Sachs Global Investment Research.
Exhibit 95: National Geospatial-Intelligence Agency Exhibit 96: Estimated addressable share of NGA budget
$4.8bn estimated in FY2017 Data analysis priorities limit opportunities for contractors
Mission
Research and
Management,
Technology
Tasking
Facilities and
Geospatial Logistics
Intelligence Data
Procurement
Enterprise
Management
RDT&E
22%
Space
Communication Enterprise IT
Systems
Operations
78%
Geospatial/Signal
Intelligence
Source: Washington Post, FAS, Goldman Sachs Global Investment Research. Source: Washington Post, FAS, Goldman Sachs Global Investment Research.
Exhibit 97: Military and National Intelligence budget vs. DoD Investment ($bn)
The Intelligence budget has outperformed the Investment budget over the last decade
$90 $300
$80
$250
$70
$bn (Intelligence)
$bn (Investment)
$60 $200
$50
$150
$40
$30 $100
$20
$50
$10
$0 $0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Nat. Intel. Program Mil. Intel. Program Investment Budget
“The Department of Defense has finally awoken to the reality that we must invest in the next generation of space
capabilities, and recent budgets have begun to arrest the decline in those investments. Over the next five years, space
must be a priority for additional funding to ensure that the United States maintains its space superiority and has the
capabilities and capacity to deter and defend our critical space assets in future conflicts.”
With Space a vulnerable and important part of US strategy, satellites become a prime
target for adversary countries with larger militaries, or ones simply less reliant on
advanced technologies.
Satellites less than 15 years old Satellites beyond standard 15-year expectancy
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
US China Russia
There are 35 known active large satellites that are operational beyond the end of the usual
<15 year lives (29% of all large US defense satellites) and another 18 will reach their end of
life in the next 5 years. Most of these satellites are scheduled for replacement or have
already been replaced and merely serve as supplemental reserve systems; however, some
are likely still in operation due to sequestration and may be relieved.
Given the pace of retirements as technology accelerates, many military satellites have
shorter expected lives than the usual 15 years seen in commercial markets. This assures a
fairly continuous replacement cycle—new satellites are always in either active production/
deployment or are in development. Certain satellites and capabilities are in a near constant
state of replacement, with only small incremental upgrades rather than larger changes.
Exhibit 99: New generations are broadly replacing the current fleet
Classified sats like Keyhole, Advanced Orion, Mercury, and Trumpet starting replacement cycles
MUOS
FLTSATCOM UFO
Mobile tactical communications
Secure communications
AEHF
Milstar
Survivable communications
Advanced Orion
Telemetry/comms intercept
Communications Interception
Mercury
Mercury Follow-On
Signals intelligence
Trumpet Follow-On
Trumpet
Signals intelligence
SBIRS
Defense Support Program
Missile launch warning
Detection
FIA-R
Lacrosse
EO/Radar Imaging
Radar imagery
Keyhole Follow-On
Keyhole
Optical imagery
Source: Union of Concerned Scientists, New York Times, Gunter’s Space Page, Goldman Sachs Global investment Research.
Failed recon program Some satellite programs fail, most notably the NRO’s planned replacement for its Keyhole
creates new growth satellites. According to the NY Times, the agency spent $13bn on the Boeing Keyhole
opportunity replacement program before cancelling it amid cost overruns and schedule slippage, when
it became clear a further $5bn was required to possibly complete it. Boeing stopped
competing on optical reconnaissance satellites, but it continued to build the sister radar-
imaging FIA satellites, and Lockheed was apparently awarded a stopgap extension of the
Keyhole program according to industry observers. This gap created an air pocket of
capability and RDT&E, which we believe could be ramping at Northrop.
The major programs of the next 5 years will look similar to those of the last 5 years, with
greater capability per platform and better mix more than offsetting a slight decline in the
total number of platforms, primarily driven by the tail end of MUOS (but that will enter a
new R&D phase most likely).
Source: Department of Defense, Gunter’s Space Page, Goldman Sachs Global Investment Research.
SBIRS, AEHF and Advanced Orion are likely to offset potential weakness in the unclassified
communications satellites. Programs like a Trumpet update may be extended beyond HEO
to GEO, which could add meaningful upside. However, the possibility of the Keyhole
replacements creates the most significant upside. Each satellite could cost several billion
dollars, with additional MSD billions in RDT&E. It is possible there is also some follow-on
to the highly secretive ‘Misty’ program launched at the end of the 20th century, which could
compound the upside from an optical surveillance system. We also expect that the STSS
demonstrator may turn into a procurement program, as threats to space assets become
more apparent. NOC was the prime on the demonstrator. OA’s GSSAP satellites may
become more prevalent as a ‘neighborhood watch’ spacecraft.
The satellite programs described above are only the largest—fleets of small CubeSats are
increasingly attracting attention at DARPA and the space agencies. Although these tend to
be low cost today, a distributed space architecture could come to rely on them more, and
miniaturization could compress higher value payloads into these smaller buses.
Addressable US The unclassified budget is 18% lower in the next 5 years vs. the last 5 years, mostly due to
military space the inclusion of pre-sequestration spending, meaning that we expect a total addressable
spending likely up Defense space budget increase of 19%, including Classified.
19% next 5 years over
last 5 years
Exhibit 101: Total military space spending 5-year block forecast ($mn)
Unclassified -18%, Classified +36%, Total +19%
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
Last 5 Years Next 5 Years
Unclassified Classified
In 1987, the Congressional Budget Office published a report that suggested the cost of each
successive generation of fighter jet increases by more than 150%. Like with jets, each
generation of military satellites is likely significantly more expensive than the current
generation as the government pushes the bounds of science and technology with its most
capable flagship platforms. Space is unique because the generations are necessarily closer
together, precipitating better growth. As an example, during the lifespan of 4th Gen fighters,
there will be at least 3 distinct generations of GPS satellites deployed.
Russia and China are currently the only countries with the ability to send people to space.
China’s space program has been rapidly launching new assets to orbit. The capability gap
between China and the US still exists, and that makes China a threat in that they have less
to lose in terms of space assets. On the basis of GDP, Russia is even more exposed to the
security of space than the US, and it has a half century of experience coexisting peacefully
there, realizing the importance of that domain in nuclear deterrence and human progress.
China routinely launches satellites where the use is unknown. China is looking to build out
a space architecture, similar to that of the United States, with advanced and broad
capabilities. For example, China appears to fly a similar constellation of NOSS-like satellites
for tracking ships. China is testing QUESS, a quantum communications system that could
have substantial cyber defense walls.
Russia’s space presence is in decline, for now, but its legacy infrastructure is formidable.
The country is pivoting from Baikonur to Vostochny, and is reinvesting in its space supply
chain. Construction is delayed due to a multitude of issues. The site is likely less ideal than
Baikonur, but it is illustrative of Russia’s continued interest in space. US and Russian
commercial space economies are intertwined with both countries edging away from
shared technology and resources, which could increase tensions and volatility in space,
though the International Space Station will remain a symbol of cooperation.
Exhibit 102: Current share of milsats launched (0-5 y/o)… Exhibit 103: …vs. prior share (11-15 y/o satellites)
US share of most recent 5 yrs launches vs. Russia and China US share of 2002-2006 launches vs. Russia and China
Russia
Russia
USA
China USA
China
European Militarization
European co-operation to militarize space has so far been limited. In fact, the ESA’s charter
stipulates that it should pursue space programs for ‘peaceful purposes’ only, and there is
no military section in the budget. Since 2015, the USA, China and Russia have launched 15,
11 and 10 military-class payloads into orbit respectively, while Europe has launched one
according to the FAA and Union of Concerned Scientists. There is some potential friction
here between the European Union and the ESA (formed separately in 1973), as while the
EU wants more cooperation on space security, member states are reluctant to allow the EU
to usurp control over space matters potentially due to questions over allocation of work. As
a result, programs like Copernicus (the ESA’s world observation system) have remained
commercial, and member states like France, Italy, Germany, Spain and the UK have
obtained their own individual military satellite communications systems. More recently
though, there have been indications of change. The new Galileo positioning and navigation
system has a non-military label, but will allow secure signals for military use. Meanwhile, a
consortium working for the European Defence Agency (which includes Airbus) has
proposed a govsatcom system which would be entirely owned by the EU, to address
border surveillance, civil protection and other governmental needs. These appear to be
early steps towards more cooperation on European space security and a move away from
reliance on the US.
Space Fence, LMT’s space object tracking system, like several other programs, is the product of substantial cooperation
between countries. In this case, Space Fence will be shared by at least 8 countries (US, Australia, Japan, Italy, Canada,
France, Republic of Korea, and the UK), as well as the ESA. Shared resources are force-multipliers for countries that
would not be able to afford their own platforms.
According to a SpaceNews article, General Raymond, now Commander of US Space Command, wrote a memo calling
for increased collaboration, saying “When we operated in benign environments, these partnerships were important; in
contested domains they are critical.”
Infrastructure in space is expensive, so much so that asset-sharing has become common among allies, and even
adversaries. The International Space Station is a prime example of countries cooperating for the benefit of everyone.
The US GPS satellites provide precision navigation for everyone globally, though alternatives are emerging.
Beyond cost, the fundamentals of geography often necessitate collaboration. Tracking stations are positioned around
the world to maintain continued telemetry with spacecraft. With Space Fence, tracking in the southern hemisphere is
conducted by a station in Australia. On the civilian side, telescopes are positioned globally—each hemisphere will never
see certain parts of the night sky—and are shared by the scientific community.
Exhibit 104: International Space Station Exhibit 105: Global Positioning System
$160bn shared asset on orbit Everyone, including America’s adversaries, can use it
Other countries have demonstrated an ability to destroy satellites through missile strikes
(eg, China since 2007 and Russia for half a century), suggesting that space assets may not
be all that secure from potential threats. US Strategic Command has stated that every US
spacecraft could soon be vulnerable to threats.
With much of the US competitive military edge derived from on-orbit technology, the US
could be disproportionately disadvantaged from potential space conflict. Mobilizing for
space conflict readiness is going to be expensive.
160
140
120
100
80
60
40
20
0
How to kill a satellite, and how to protect one: a practical guide for investors
Satellites are very fragile, and travel at thousands of miles per hour. It does not take much
to render one inoperable. Cyber attacks, lasers, missiles, parasitic satellites, radio jamming
could all do it. Satellites now require broad-spectrum defenses. While highly secretive
about plans to protect space assets, governments appear to be committing substantial
resources to their defense, as well as offensive capabilities to disable adversaries’ satellites.
Offensive capabilities
The three major space powers have demonstrated capabilities to destroy orbiting satellites.
When a satellite is hit, its shards spread throughout its orbit and into nearby flightpaths,
creating the potential for collateral damage. Alternative methods—lasers, cyber-attacks,
jamming, and parasite satellite attacks—are cleaner and more temporary, but those
systems are still in their infancy.
Defensive capabilities
If hitting an object moving thousands of miles per hour is difficult, protecting those objects
is even harder. Countermeasures might work some of the time, but missiles would likely
not be fooled and the shrapnel from a successful missile detonation in the vicinity of a
satellite could be just as deadly as a direct hit. We outline key steps that are likely being
taken to better protect space assets.
Step 1: Identify: Identifying risks to US space infrastructure is a top priority. This requires
systems both on the ground, like Space Fence built by Lockheed, and those on orbit, like
the Geosynchronous Space Situational Awareness Program built by Orbital ATK and the
Space Tracking and Surveillance System Demonstrator built by Northrop Grumman.
Step 2: Disguise: Most satellites are visible at night to the naked eye or a pair of
binoculars—this means that it is broadly known where they are and they are readily
apparent on radar. Hobbyist trackers report that the US military is adding optical/radar
stealth systems to their satellites. These are likely to have a minimal radar cross section
and be among the most expensive platforms flying today.
Step 3: Dodge: The advantage of moving 17,000 miles an hour is that a small change in
velocity leaves the object in a radically different place than it was moments before and a
fairly small amount of energy can quickly accomplish that. However, satellites do not carry
much fuel, so parallel efforts are underway to extend their lives. Systems like OA’s MEV
and MDA’s SIS system could stretch the fuel further.
Government
16%
Non-
Government
84%
Step 5: Replace: If satellites are destroyed, they must be rapidly replaced to restore critical
warfighting capabilities. Navigation, communications, bomb guidance, and intelligence all
heavily rely on them. This could mean that satellites, and the rockets to launch them,
would be stockpiled as the likelihood of space conflict increases, though many of these are
likely to be less capable smallsats. Several GPS satellites are known to be currently orbiting,
deactivated but ready for use. It is actually standard practice to classify certain satellites
launched to space as debris as a form of deception. Still, the military is exploring new
vehicles that can launch repeatedly in short periods of time at low cost.
The secretive XS-1 program is designed to test cheap reusable technologies. Another
program, Operationally Responsive Space is developing expendable rockets capable of
launching constellations quickly. We see reusability being a key theme tested by the
government, as it seeks a high volume of launches in a short period of time at low cost.
Only specially certified launch vehicles are eligible for national security launches, and
before 2015, only ULA’s Atlas V and Delta IV were qualified. Critically, the Atlas V flies
using the Russian-made RD-180 engine. Following US sanctions on Russia, the availability
of the engine has come into question, but ULA indicate these issues are behind them.
In 2014, SpaceX successfully sued the US government for the right to compete in EELV
launches with its Falcon 9 rocket. In 2016, SpaceX won its first EELV mission, an $82.7mn
contract to launch a GPS satellite in 2018. Given the large differential in price, there is
concern in the industry that the Pentagon will swap one monopoly for another. We think
EELV requirements for price, reliability, and availability will naturally combine to prevent a
monopoly by ULA or SpaceX.
Whereas commercial launches are insured, government launches are generally self-
insured—i.e., the government still pays for a loss. And because most EELV launches are
national security related, delays can have a big impact for the Pentagon. Diversification to
the Falcon 9 helps, and the presumptive certification of the Falcon Heavy will create a full
spectrum alternative to the ULA offerings, but those programs have had schedule issues.
While the Falcon 9 is cheaper than an Atlas V, the rocket’s failure rate is concerning, and it
has been grounded nearly 50% of the time between its June 2015 failure and present. The
failure rate, while relatively low, means that government officials take substantial risk in a
given launch. The current 91% success rate implies that the risk-adjusted cost for Falcon 9
is $187mn ($90mn higher than its most recent government GPS launch award value) if the
EELV payload + rocket cost is ~$1bn. An Atlas V would likely have cost ~$150mn with its
100% success rate. Large national security and science launches, which might be lifted on
the Falcon Heavy, can likely reach ~$10bn+. We do not think there will be much pressure in
the ultra-heavy space occupied by the Delta IV. The payloads on those launches prioritize
reliability above all else, so the addition of the alternative possibly cheaper Falcon Heavy is
unlikely to be a serious threat given the entrenched record held by the Delta IV.
Exhibit 108: Space ground-based infrastructure unclassified budget: NASA, USAF, Navy and Army
Ground infrastructure to support military fleets moves ~$8bn a year. FYDP for Navy, AF and Army; Notional budget for NASA
FY2016 FY2017 FY2018 FY2019 FY2020 FY2021
US Air Force Programs 1,080 1,140 801 694 530 547
GPS Operational Control Segment (OCX) 349 393 253 233 125 127
JSPOC Mission System 81 73 63 65 67 69
Space Fence 241 168 50 5 - -
Space and Missile Center - Civil Workforce 176 177 189 192 196 197
Other programs 233 329 247 198 143 153
US Navy Programs 54 44 57 57 52 32
US Army Programs 952 676 930 977 1,087 1,017
WIN-T - Ground Forces Tactical Network 695 437 705 686 784 748
Defense Enterprise Wideband Satcom Systems 172 144 134 178 170 140
Other programs 85 95 91 112 132 129
NASA Programs 5,978 6,015 6,160 6,271 6,411 6,603
Exploration Systems Development (Orion, SLS, EGS) 410 455 441 453 458 465
Space Operations: Ground infrastructure support 1,871 1,909 2,040 1,981 1,959 2,040
Safety, Security and Mission Services 2,769 2,837 2,894 2,952 3,010 3,071
Construction and Environmental Compliance and Restoration 389 420 390 398 406 414
Other programs 539 394 395 487 579 614
TOTAL 8,064 7,876 7,947 7,998 8,080 8,199
Source: NASA, USAF, Navy, Army, DoD.
Source: NASA.
Disclosure Appendix
Reg AC
We, Noah Poponak, CFA, Matthew Porat, Michael Bishop, Chris Hallam, Brett Feldman, Heath P. Terry, CFA, Andrew Lee, Sam Wood, Peter Lapthorn,
Tais Correa, Gavin Parsons, Adam Hotchkiss and David Tamberrino, CFA, hereby certify that all of the views expressed in this report accurately
reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was,
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
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dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Integrated IP score is a composite of Growth, Return and Multiple scores.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Noah Poponak, CFA: America-Commercial Aerospace, America-Defense. Michael Bishop: Europe-Telecom Services. Chris Hallam: Europe-Aerospace
& Defence. Brett Feldman: America-Telco, Cable & Satellite, America-Towers. Heath P. Terry, CFA: America-Internet. Andrew Lee: Europe-Telecom
Services. David Tamberrino, CFA: America-Autos & Auto Parts, America-Autos Dealers, America-Rental Car.
America-Autos & Auto Parts: Adient Plc, BorgWarner Inc., Cooper-Standard Holdings, Delphi Automotive Plc, Ford Motor Co., General Motors Co.,
Goodyear Tire & Rubber Co., Harley-Davidson Inc., Lear Corp., Magna International Inc., Magna International Inc., Tenneco Inc., Tesla Inc., Visteon
Corp..
America-Autos Dealers: AutoNation Inc., Camping World Holdings, Group 1 Automotive Inc..
America-Commercial Aerospace: BE Aerospace Inc., Boeing Co., Bombardier Inc., Embraer, Esterline Technologies Corp., Hexcel Corp., Rockwell
Collins Corp., Spirit AeroSystems Holdings, Textron Inc., TransDigm Group, Triumph Group, United Technologies Corp..
America-Defense: FLIR Systems Inc., General Dynamics Corp., Harris Corp., Huntington Ingalls Industries Inc., L3 Technologies Inc., Leidos Holdings,
Lockheed Martin Corp., Northrop Grumman Corp., Orbital ATK Inc, Raytheon Co..
America-Internet: Amazon.com Inc., Bankrate Inc., Criteo SA, eBay Inc., Endurance International Group, Etsy Inc., Expedia Inc., Groupon Inc.,
GrubHub Inc., IAC/InterActiveCorp, LendingClub Corp., Match Group, Netflix Inc., Pandora Media Inc., PayPal Holdings, Priceline.com Inc., Shutterfly
Inc., Snap Inc., TripAdvisor Inc., Trivago N.V., TrueCar, Twitter Inc., WebMD Health Corp., Yahoo! Inc., Yelp Inc., Zillow Group, Zynga Inc..
America-Rental Car: Avis Budget Group, Hertz Global Holdings.
America-Telco, Cable & Satellite: AT&T Inc., CenturyLink Inc., Charter Communications Inc., Cogent Communications Holdings, Comcast Corp., DISH
Network Corp., Frontier Communications Corp., Intelsat SA, Level 3 Communications Inc., Sirius XM Holdings, Sprint Corp., T-Mobile US Inc., Uniti
Group Inc., Verizon Communications, Windstream Holdings, Zayo Group.
America-Towers: American Tower Corp., Crown Castle International Corp., SBA Communications Corp..
Europe-Aerospace & Defence: Airbus Group, BAE Systems, Cobham, Dassault Aviation, GKN, Leonardo-Finmeccanica SpA, Meggitt, MTU Aero
Engines, Qinetiq, Rolls-Royce, Saab Group, Safran, Thales, Ultra Electronics.
Europe-Telecom Services: Altice N.V., Bouygues, BT Group, BT Group, Cellnex Telecom SAU, Com Hem Holding, Deutsche Telekom, Drillisch AG,
Elisa OYJ, Eutelsat Communications, Iliad, Infrastrutture Wireless SpA, Inmarsat Plc, Liberty Global Plc, Orange, Orange Belgium SA, Proximus Plc,
Royal KPN NV, SES SA, SFR Group, Sunrise Communications Group, Swisscom, TalkTalk, TDC A/S, Tele Columbus, Tele2, Telecom Italia, Telecom
Italia, Telefonica, Telefonica Deutschland, Telenet, Telenor, Telia Co., United Internet, Vodafone, Vodafone.
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